When you exercise your stock options, you’re buying stock in your company. More specifically: you are choosing to exercise the option granted to you to buy stock in your company.
The process of exercising, or buying, your stock options is relatively simple. But there are some things to be aware of, so you don’t run into unnecessary surprises.
We also recommend gathering some information to be prepared and informed.
The process of exercising stock options
Most companies provide employees access to an equity management platform, such as Carta or Shareworks. Logging into one of these platforms will let you access your stock option grants, and kick off the exercising process.
Typically, you’ll log in and select your company to view your equity details. Note that you may see former companies you’ve worked at that also used the same equity management platform.
When you select your company, you’ll likely be able to see:
- How many stock option grants you have
- How many have vested in each grant
- The strike price for each grant
- The current fair market value or 409A of your company’s stock
Follow the steps in your equity management platform to complete the exercise process and transaction. The steps could differ depending on what platform your company uses, but will likely include the following:
- Confirming your contact and personal information: Your legal name, current address, etc.
- Confirming any additional tax-related information
- Choosing how many stock options you want to exercise
- How you want to pay the base cost (usually via a bank account or wire transfer)
Before you finalize the transaction, the platform should also estimate your base cost to exercise, and could also show potential taxes.
Be aware that you will likely only pay the base cost during the exercise process. Additional taxes you may owe are your responsibility to calculate and pay. Paying taxes does not usually happen within your equity management platform.
Once you finalize the transaction, the request to exercise is then sent to your company. Usually, your company — and possibly the board of directors — will have to approve your request. When they do, the process is finalized, and your costs are deducted from the payment method you selected.
Now when you log into your equity management platform, you should see a certificate (or multiple if you exercised multiple grants) confirming you’ve exercised.
If your company does not have an equity management platform, or you’re unsure where to find it, contact your equity administrator or your People/HR team.
Where to find tax forms after you’ve exercised stock options
As mentioned above, it’s likely you will owe taxes when you exercise your stock options. There are two common forms of stock options: Incentive stock options (ISOs) and non-qualified stock options (NSOs). Both are taxed differently, so it’s good to be aware about how you report and pay those taxes.
ISOs are subject to the alternative minimum tax (AMT). When you exercise, taxes may be estimated for you in your equity management platform, but you will not be asked to pay them. You are responsible for both calculating your exact AMT and paying the tax.
For ISOs, you will need to file Form 3921. You should be able to find this form in your equity management platform. If you aren’t able to find it, contact your equity administrator or your People team.
For NSOs, they are taxed as income. Your employer is required to withhold taxes on it at the time of exercise. And this should also be reflected on the W-2 you receive from them. But it is still your responsibility to make sure that the correct amount was withheld. It is possible you could owe more.
To learn more about stock option taxes, see our collection dedicated to the topic.
When to file the 83(b) election
You may have heard about the 83(b) election. This is a tax form that is related to early exercising. While most companies don’t allow employees to exercise their stock options until they’ve vested, some may allow early exercising — or the ability to buy them before they’ve vested.
If your company allows early exercising, you may need to file the 83(b) election. Note that, if you do need to file it, you need to do so within 30 days of exercising.
Choosing to exercise your stock options can be a big decision, but you can easily look at different exercise scenarios to see when the right time is for you.