If you’ve spent any time around startup equity, you’ve probably heard someone describe the standard 90-day post-termination exercise window as a “trap for the well-meaning employee”. That is a little dramatic, but not entirely wrong. When an employee leaves the company, the default rules governing most option plans give them a short runway, typically 90 days, to exercise vested stock options or forfeit them. For an employee who cannot afford the exercise price plus the resulting tax bill, that runway can feel more like a cliff.

In recent years, a number of high-profile companies have responded by extending that window, sometimes to as long as seven or ten years. The move is often marketed as a founder-friendly, employee-friendly act of good corporate citizenship. And in many respects it is. But like most things in equity compensation, the decision carries consequences that reach well beyond the departing employee and into your cap table, your tax analysis and your relationships with the people who stayed. This post walks through the trade-offs so you can make the call with your eyes open.

A Few Real-World Examples

This is not a hypothetical trend. A number of well-known companies have publicly adopted extended windows, and their announcements are a useful window into the design choices involved. Coinbase extended its post-termination window from the standard 90 days to seven years for new employees who join and stay at least two years, a change it announced in August 2015 and credited to the influence of Sam Altman and Pinterest. Pinterest was among the loudest early voices, moving to a seven-year period, reportedly available after two years of employment, in response to its rising valuation and transfer restrictions that made the short window especially burdensome for option holders. Quora went further and earlier, adopting a ten-year period measured from the grant date back in 2014, making it among the first companies to do so.

The pattern to notice is that most of these companies did not simply flip to an open-ended window; they paired the extension with a minimum-tenure requirement to keep it tied to real contribution.

First, a Refresher on the 90-Day Rule

The 90-day exercise window is not a law. It is a convention, and it exists largely because of the tax treatment of incentive stock options (ISOs). Under the Internal Revenue Code, an option only qualifies as an ISO if, among other things, it’s exercised no later than three months after the employee’s termination of employment (with a longer period for death or disability). Exercise the option outside that window, and it loses ISO status and is treated as a nonqualified stock option (NSO) for tax purposes.

Because ISOs carry meaningful potential tax advantages for employees, most equity plans historically defaulted to the 90-day period to preserve that treatment. In other words, the “standard” window was never really about protecting the company. It was about protecting the tax profile of the option. That distinction matters, because it means extending the window does not eliminate the ISO issue; it simply changes who bears it and how.

The Case for Extending the Window

The argument in favor of a longer exercise window is genuinely compelling, and it comes down to fairness and talent competitiveness.

Consider the employee who joined early, took below-market cash compensation, and helped build real value over four or five years. If that person leaves, whether to care for a family member, to start a new venture or simply because the fit is no longer right, the 90-day rule forces an uncomfortable choice. To keep the equity they earned, they must come up with the exercise price and, for NSOs, the tax on the spread between the strike price and the current fair market value. For an employee at a company whose valuation has climbed, that combined cost can run into six figures. Many simply cannot write that check, and so they walk away from options they genuinely earned. The equity that was supposed to reward their contribution instead reverts to the company.

Extending the window addresses that inequity directly. It lets departing employees defer the decision (and the cash outlay) until there is liquidity, or at least until they are in a better position to act. For founders who care about their reputation as employers, and who want to recruit in a competitive market, offering an extended window can be a powerful signal. It says, in effect, that the equity you grant is meant to be kept, not quietly clawed back on the way out the door.

The Case Against (or at Least, the Complications)

Here is where the lawyer in me starts raising a hand. An extended exercise window is not free, and the costs are easy to underestimate.

The most immediate consequence is the loss of ISO treatment. As noted above, an option exercised more than three months after termination is treated as an NSO. So if you extend the window and employees take advantage of it, they generally lose the ISO tax benefits they might otherwise have enjoyed. Some companies address this by converting ISOs to NSOs at the time they adopt the extended window, so that expectations are clear from the outset. Either way, the “employee-friendly” gesture comes with a tax asterisk that should be disclosed plainly rather than discovered later.

The second consequence is felt on the cap table. Options that would have expired in 90 days now linger for years. That means your fully diluted share count stays inflated, your option pool math becomes harder to manage, and former employees – people who no longer contribute to the company – remain potential stockholders for a long time. In a future financing, investors will look at that overhang. In a future acquisition, those unexercised options complicate the waterfall and the closing mechanics.

Third, there is a fairness argument that cuts the other way. A generous exercise window rewards people who leave with the same optionality it gives people who stay. Some founders and boards take the view that equity is meant to incentivize continued contribution, and that letting departed employees hold cheap, long-dated options dilutes the very people still doing the work. Reasonable minds differ here, but it is a conversation worth having at the board level rather than assuming everyone shares the same instinct.

Finally, there are accounting and administrative wrinkles. Modifying outstanding options to extend their term is a modification for accounting purposes and can trigger incremental stock-based compensation expense. And once you extend the window for one departing employee, you will find it very difficult to deny the same treatment to the next one. Consistency is not just good practice; it is a hedge against discrimination and morale problems.

How Thoughtful Companies Split the Difference

The good news is that this is not a binary choice. Between the stingy 90-day default and a decade-long window, there is a great deal of room to design something sensible.

Some companies extend the window modestly, e.g., to twelve months, which softens the cliff without leaving options outstanding indefinitely. Others tie the length of the extended window to tenure, rewarding employees who stayed longer with more time to exercise. Still others reserve extended windows for good-leaver scenarios, distinguishing between the employee who departs on good terms and the one terminated for cause. And a growing number simply adopt an extended window as a plan-wide default from the start, so that the terms are transparent to every new hire and there is no awkward, case-by-case negotiation on the way out.

Whatever approach you choose, the key is to decide deliberately and document it clearly. The worst outcome is an ad hoc extension granted to a favored departing executive, with no policy behind it, that sets a precedent you never intended and cannot easily walk back.

The Bottom Line

Extending the post-termination option exercise window can be both a founder-friendly move and a cap table headache, and the two are not mutually exclusive. Done thoughtfully, it is a meaningful way to honor the equity your team has earned and to distinguish yourself as an employer. Done reflexively, it can inflate your cap table, surprise employees with unexpected tax consequences, and create precedents you regret.

If you are weighing this decision, the right sequence is straightforward: understand the ISO tax mechanics, model the cap table impact over a realistic time horizon, decide as a board what message you want your equity program to send, and then build a clear, consistent policy rather than a series of one-off exceptions. Equity is one of the most valuable tools a startup has for attracting and rewarding talent. How you handle it on the way out says as much about your company as how you grant it on the way in.

This post is for general informational purposes only and does not constitute legal or tax advice. Equity compensation decisions involve company-specific facts and evolving tax rules; consult your counsel and tax advisors before adopting or modifying an exercise window policy.