Skip to content

Should You Exercise Your Options (in a private company)…to Give Your Career More Flexibility?

Flow FP's block woman exercises her stock options -- at the gym!

Should I exercise my options? When should I exercise my options?

If you work in a private company, I’m betting these questions go through your head with annoying frequency. And they’re hard questions to answer! Will the company succeed? Will the stock be worth anything? A lot? It’s all crystal-ball territory and therefore there are very few obvious or knowable answers.

I’ve written a bunch of blog posts about stock options. But recently I’ve seen a new dynamic emerge from two different clients, different companies, opposite coasts, but facing the exact same quandary around their stock options. And it is not primarily about taxes or money, really. It’s about the fact that they have a pile of vested stock options which would be really expensive to exercise, and that’s complicating their decision to leave their jobs.

If you don’t exercise your options, and you end up with a big pile of vested, unexercised options, you might feel stuck at your company.

Let me explain…

Not Exercising Your Options Can Make Your Career Choices Harder

I feel that this must involve numbers, so forgive me for any bleary eyes.

Let us say you get granted some options when you’re first hired into a new company. Congratulations on your new job!

  • 10,000 options
  • ISOs (incentive stock options). It’ll say that right on page 1 of your stock grant document). This story also works with NQSOs (non-qualified stock options), just not as well.
  • Strike price is $1. Again, on page 1 of your grant document.
  • Current value of the company stock is also $1. For private companies, this is called the 409(a) valuation. Some companies are very forthcoming with this value. Sometimes you have to ask. You can simply email someone in HR or Finance this question, “What is the 409(a) valuation of a share of company stock?”

After a year, ¼ of them (2500) vest. At this point, the company stock is still worth $1. You could exercise those 2500 options for $2500 all up, no taxes due. But you don’t because hey, $2500 is a lot of money and this company is really young and might come to nothing and you’ve got time.

Fast forward three years, you still haven’t exercised any options. All 10,000 options are now vested, the strike price is still $1, but now the company-stock value is $20. Why has it risen? Because your company has successfully raised money several times, and each time it raised money, the 409(a) valuation increased.

The Cost of Waiting to Exercise

Now how much would it cost to exercise all these options? The easy math is: Strike price = $1 x 10,000 options = $10,000.

But now we also have to think about taxes. Why? Because when it comes to ISOs, the “spread” between the strike price and the current value is “AMT” (Alternative Minimum Tax) income, and you might owe actual (alternative minimum) taxes on it if it’s big enough.

At first vest, the spread was $0 ($1 409(a) valuation – $1 strike price), so there would have been no taxes if you exercised then. Now the spread on a single share is $19 ($20-$1). If you exercise all 10,000 options, that’s $190,000 AMT-eligible income. You’re definitely going to owe taxes on that. How much? That depends on the rest of your tax situation. And even if you were my client and I knew those details, I’d still tell you to get that information from your CPA because that sh*t is complicated and I want a tax professional doing the calculations.

So, let’s say the taxes you’d owe would be $45,000 (I have no idea, but that’s not unreasonable).

[table id=2 /]

Ouch, that is a lot of money. (And maybe the number is much much higher in your particular circumstances. Or lower. It’s just an example, people.)

If you stay at your company, maybe it’s no big deal. You could exercise some of your options this year and each subsequent year for several years until the company goes public, staying under the AMT threshold and just paying the strike price on, say, 1000 options each year, for a total cost of $1000.

Leaving Your Company Starts a 90-Day Clock

But what if your company lays you off? It happens, you know. Or you get sick of working at your company? Or you want to take a sabbatical? Or go back to school? Or you have to leave to go take care of a loved one?

Well, with ISOs, you usually have a whopping 90 days after leaving to exercise your vested options…or lose them forever.

And here is the crux of the problem:

Leaving your job now involves a $55,000 choice. It’s not just a career decision anymore.

Do you gamble (yes, gamble) $55,000 in order to exercise all those options? Or do you keep all your cash and lose all the options (and the however-unlikely potential big bucks in company stock later)? Or do you gamble less money to exercise some of the options and lose the others?

Note: Sometimes you can convert ISOs to NQSOs when you leave a company. NQSOs often have a 3-year time frame, not 90 days, to exercise. This gives you a lot more time to see if the company is actually going to go somewhere. Or to spread out the cost of exercising over a few years.

How to Avoid This Fate

I agree with this Wealthfront article when it says, and I paraphrase, that there are two good times to exercise your options:

  1. Really early, when it’s cheap to exercise because both the strike price and the company valuation are low (cheap, but high risk because the company is so young)
  2. Late, when your company has filed to go public (expensive, but lower risk because yay! we know we can turn the company stock into actual money in the stock market)

And those are the rules I normally pass on to my clients.

But let’s say you miss the “Really early” because you weren’t hired early, or because you simply didn’t exercise at that point (often a totally legit decision). And let’s also say your company has not yet filed to go public. Choosing to leave your company at that time can get pretty difficult because the “exercise or lose” decision is a total gamble, but it’s a decision you have to make.

There are many considerations when it comes to your decision to exercise your options. But seeing two clients struggling with this decision (Can I leave my company? What would I do with my options if I did?) suggests to me that:

Each year, you should be thinking “Should I exercise some of my options this year?”

Maybe the answer is No! Exercising private-company stock is a gamble, not an investment. For all the people who have gotten rich off of Uber, there are more (some of my clients among them) who have lost $10,000s because they exercised options at companies that went nowhere. (WeWork, anyone?)

But if the answer is Yes, then you will reduce the number of vested, unexercised options, and therefore make the decision a little bit smaller, a little bit easier if and when you leave your company.

I want for you to be able to make career decisions based on what you want in your career and personal life, not because of some weird, complicated stock-compensation jumble.

Do you want some help having these larger, more holistic conversations about your stock compensation? Reach out to me at  or schedule a free consultation.

Sign up for Flow’s weekly-ish blog email to stay on top of my blog posts and videos, and also receive my guide How to Start a New Job (and Impress Yourself and Everyone Else).

Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.

Recommended Posts