How to pay for stock options as a startup employee or executive
John’s a Director at Secfi, helping founders, executives and employees navigate equity compensation and access to liquidity through his expertise in finance.
0 result
0 result
John’s a Director at Secfi, helping founders, executives and employees navigate equity compensation and access to liquidity through his expertise in finance.
If you’ve got some equity and are wondering how to pay for your stock options, you’re in good company.
Startup employees who want to exercise their stock options don’t always have the tens of thousands (or hundreds of thousands) in cash sitting around. And even if you do, putting it all into your company might feel a bit risky.
What’s more, exercising means getting your head around some complicated tax rules. Even if you don’t receive any income from your shares yet, your tax bill can be surprisingly high when you exercise.
Figuring out how to pay for stock options becomes even more urgent if you’re:
But there’s more than one way to pay for your stock options, which we’ll cover in more detail including:
The 5 different ways to pay for stock options
How to decide how to pay for your stock options
Why use Secfi to plan how to pay for your stock options?
How a startup leader used non-recourse financing to pay for his stock options and tax bill while minimizing personal risk
Note: Secfi provides equity planning tools and financing to help you understand and manage your stock options. Try Maeve, our free AI equity assistant, to estimate your exercise costs and tax implications.
Exercising stock options with your own cash is simple and straightforward. You save up the money necessary to exercise, and follow the steps in your company’s stock option platform (such as Carta or Shareworks) to purchase your shares.
Depending on your company’s plan, you may also be able to use an early exercise provision to buy unvested options before they vest. A financial advisor can help you compare that route with a staged exercise plan, such as exercising enough each year to stay under the AMT threshold.
To learn more about AMT and why it should be on your radar, read: What is the alternative minimum tax (AMT) and how does it work?
The big benefit to paying in cash is that you own your shares outright. You don’t need to pay back a loan, or make interest payments while waiting for an exit.
The big risk is that your company fails or experiences a disappointing exit. In the case of failure, you’d likely lose your investment. Even if your company exits, your returns may be lower than what you could have earned by putting your money into a more diversified portfolio.
There is a small silver lining to a company failing. If you end up losing money on your stock options, you may be able to report capital losses in your current (and future) tax years, to offset capital gains made elsewhere. If you paid AMT, you may also be able to use the AMT credit in future tax years.
Separately, depending on how much it costs to exercise your stock options, there’s an added risk that you concentrate too much of your money in a single investment. Even if you’re confident in your company and its future growth, putting all your eggs in one basket may not be your preferred way to invest.
One way to figure out your potential tax treatment, including ways to minimize AMT, is to use our AI equity assistant Maeve. You can model different tax and exercise scenarios with your unique information by connecting directly with Carta or inputting your specific details.
For illustrative purposes only. Actual results may vary and there is no guarantee of any particular outcome.
Some people take out traditional (recourse) loans to exercise their stock options. That’s usually when you’re confident that your stock options will be worth something in the future, and you feel comfortable paying a traditional interest rate to a lender in the interim.
The benefit of using a traditional loan is that you don’t have to tie up a large amount of money upfront to exercise your stock. If you already have that money on hand, you can spend it elsewhere, whether that’s a down payment on a house, or in the public markets.
The main risk is that the company fails or experiences a disappointing exit. In that case, you’ll owe the lender the full amount of the loan, with interest. Because traditional loans are recourse, the lender may be able to pursue your other assets if you can’t repay it.
Non-recourse financing is similar to a traditional loan, in that a lending company gives you the money you need to exercise a specific number of stock options. But non-recourse means the only collateral that the lending company can pursue is the value of the shares themselves, not your other assets, such as your savings, investment accounts, or property.
The big benefit to non-recourse financing is that you don’t have to risk your own money when exercising your stock options. If the company fails, or experiences a disappointing exit, the lending company will attempt to recoup their money by selling some or all of your shares. None of your other assets are at risk.
Like any loan, non-recourse financing does come with fees. And you may lose some of the upside in your shares if your company experiences a successful exit. Additionally, there may be some additional tax consequences if your company does not have an exit.
In select cases, there might be so much demand for your company’s equity that a secondary market emerges, and investors offer to purchase your privately held shares. Sometimes, your company itself may organize a tender offer, giving eligible employees and shareholders a limited window to sell some of their shares at a set price.
If you have shares in the company, you can choose to sell some or all of those shares in return for cash today.
But not all companies allow their shares to be traded on a secondary market, and those that do could impose limits on how many shares you can sell. And because buyers are taking on the risk of holding illiquid private shares, secondary sale prices may be lower than the company’s latest valuation.
The big benefit to selling shares on a secondary market or tender offer is that you’re locking in some cash from your stock options. Some cash in hand today is more certain than the possibility of more cash in the future.
The big risk is that the company successfully exits, and you fail to experience the upside from your shares. While your colleagues are celebrating, you may wish you’d kept at least some of your equity.
Some people instead opt to sell a portion of their shares, and use the resulting proceeds to exercise their remaining stock options. That allows you to participate in some of the upside if the company successfully exits.
Unlike a tender offer or secondary sale, where you sell private shares for cash, a cashless exercise lets you exercise your options and immediately sell the resulting shares to cover the exercise cost.
The sale proceeds from a cashless exercise are used to cover the strike price, taxes, and any fees, so you don’t need to provide the full exercise cost from your own savings.
Cashless exercises aren’t guaranteed at any particular point, but they’re most commonly available after an IPO, once there’s a public market for the shares. They may also be available during a company-run tender offer or another private liquidity event.
The main benefit of a cashless exercise is simplicity. You don’t have to commit a large amount of cash, and you receive any remaining proceeds after the exercise costs and taxes are covered.
The trade-off is that you won’t retain the future upside on the shares you sell. Your tax treatment also depends on whether you hold incentive stock options (ISOs) or non-qualified stock options (NSOs). A same-day sale of ISOs may prevent you from meeting the holding period requirements for long-term capital gains treatment, while the spread on NSOs is generally taxed as ordinary income when you exercise.
There’s no single payment method that works for every startup employee. Your options may be limited by your company’s policies, whether there’s a buyer for its shares, your access to financing, and how much personal risk you’re comfortable accepting.
For example:
A secondary sale may not be available if there’s little demand for your company’s shares or if it restricts private transfers.
Waiting for a cashless exercise means relying on your company to create a liquidity opportunity, with no guarantee it will happen before you leave or your options expire.
A traditional loan may also be difficult or expensive to access without enough income or collateral.
You may not qualify for non-recourse financing if the provider isn’t comfortable taking on the company’s risk.
As a starting point, the table below can help you compare the main ways to pay for stock options.
| Payment method | It may suit you if… | Main trade-off | Availability |
|---|---|---|---|
Pay with cash | You can afford the exercise price and potential taxes, while keeping enough savings for other priorities | You’re putting your own money into one illiquid company, and you could lose it if the company fails | Available if you have enough cash and your options are exercisable |
Take out a traditional loan | You want to preserve cash and can comfortably make repayments | You generally owe the loan and interest regardless of what happens to the company, and your personal assets may be at risk | Depends on your credit, income, collateral, and the lender’s requirements |
Sell shares through a tender offer or secondary market | You want cash now and are comfortable giving up potential future upside | You may sell at a discount and won’t benefit from future growth on the shares you sell | Depends on company approval, buyer demand, and whether you already own eligible shares |
Use a cashless exercise | You want to exercise and immediately sell the resulting shares rather than hold them | You give up future upside on the shares sold and may receive less favourable tax treatment | Usually requires an IPO or another company-supported liquidity event |
Use non-recourse financing | You want to exercise while preserving cash and limiting the risk to your personal assets | The financing comes with fees, and you may retain less of the upside after a successful exit | Depends on the financing provider’s assessment of your company and equity |
There are many factors to consider when deciding how to pay for your stock options, which is why Secfi exists.
We feel the pain of paying for your stock options. One of our founders left his former company and learned that exercising his stock options would mean paying a lot in taxes. Needless to say, he didn’t exercise.
Secfi was founded so that other startup employees and executives wouldn’t be in the same situation again. We help you compare your options, understand your equity, and access financing in one place.
Here’s why over 55,000 employees from companies including Canva, Databricks, and Google trust us with their equity planning:
Before deciding how to pay for your stock options, you need to understand what exercising could cost and how each choice could impact your outcomes.
Maeve, Secfi’s AI equity assistant, brings your grants together in one place and helps you explore different scenarios using your own equity and tax information. Instead of trying to make your own spreadsheet or using a simplified online calculator, you can model all the ways to pay for your stock options.
For example, you could compare the cost of exercising now or waiting for a cashless exercise. Then you could weigh the benefits of non-recourse financing or taking out a loan if you don’t have the cash to exercise.
We built Maeve based on years of equity planning for startup employees, and you can fact-check the data and assumptions when you want to confirm its estimates.
To learn more, read: Why we built Maeve.
For illustrative purposes only. Actual results may vary and there is no guarantee of any particular outcome.
Secfi’s financial advisors are Certified Financial Planners with experience in equity compensation. They have a fiduciary duty to act in your best interest, so their guidance is based on your wider financial situation rather than whether you choose a particular financing option.
They can help you think through questions such as how much cash you can comfortably commit, how exercising may affect your taxes, and whether concentrating more of your wealth in one private company fits your wider financial plan.
For employees of eligible companies, Secfi’s non-recourse financing can cover the cost of exercising stock options and associated taxes, including a potential AMT bill. In some cases, you may also qualify for discretionary cash.
With non-recourse financing, you retain ownership of the shares and don’t make monthly repayments. If your company later has a qualifying liquidity event, such as an IPO or acquisition, you repay the amount financed plus the agreed fees. If your company doesn’t have a successful exit, you don’t repay the advance, and we can’t pursue your savings or other personal assets.
If you’re curious about how everything comes together, check out: How Secfi financing works – our business model explained.
We’re selective about the companies we can finance, so funding isn’t available to everyone. Our equity strategists work with you if you’re considering Secfi’s non-recourse financing, so we can figure out if it’s a good fit for everyone involved.
If financing isn’t suitable and you already own eligible shares, we may also be able to help you explore a secondary sale through our network of buyers and market participants.
Like many startup employees, John kept equity planning on the back burner for years. But as they inched towards an IPO, he realized something had to be done. Even with a Master's in Finance, John didn’t feel like he had a solid grasp on the complexities of equity and related taxes.
“I’d been thinking about how to finance for a few months, but I was just kind of frozen,” John said. “I didn’t know what to do about it, and I thought I was screwed, to be honest.”
John began thinking about personal loans and lines of credit, but he was nervous. He’d heard horror stories of people taking out loans in the hundreds of thousands to exercise their shares, only to have the shares end up being worth much less than the loan. And then, they’re still stuck repaying the loan (and interest).
When he learned about Secfi, John met with the team and asked all of his equity-related questions. Eventually, John decided to go with non-recourse financing.
“I felt that what Secfi offered was so unique — they were willing to write off the loss — and that was it for me.”
Read John’s story: Why a senior startup leader facing a high tax bill used equity financing.
Testimonials are specific to an individual Client’s experience and may not be representative of all Clients. Unless otherwise indicated, Clients offering a Testimonial do not receive compensation and their statement does not present a conflict of interest.
There’s no single right way to pay for stock options. The best route depends on your unique situation and how much risk you’re comfortable taking.
But making the decision without support can get confusing quickly, even if you’re already used to finances and investing. Taxes can go from an inconvenience to a major limiting factor, and opportunities to sell can be hard to come by.
We’ve provided more than $790 million as of date in financing to startup executives and employees, more than any equity financing partner. And even if you’re not eligible for non-recourse financing, our team can help you figure out how to pay for your stock options in a way that works best for you.
Try our free AI equity assistant Maeve or talk to our team if you’re ready to figure out how to pay for your stock options.
Company stock options are a form of equity compensation that gives you the right to buy shares in your employer at a fixed strike price. Your options usually vest over time according to a vesting schedule, and you must exercise them before they expire if you want to own the shares.
The cost of exercising depends on the number of options and your strike price. Taxes may also depend on the difference between the strike price and the shares’ fair market value (FMV) when you exercise. For private companies, the FMV is generally determined through a 409A valuation.
The tax treatment also depends on whether you hold incentive stock options (ISOs), non-qualified stock options (NSOs), or RSUs. With NSOs, the spread at exercise is generally taxed as ordinary income. ISOs may receive more favorable tax treatment, although exercising them can trigger the alternative minimum tax. Restricted stock units (RSUs) work differently from stock options. With RSUs, you generally receive shares once certain vesting conditions are met, rather than paying a strike price to exercise them.
Some companies also allow early exercise, which means buying options before they vest. Stock options are different from an employee stock purchase plan, or ESPP. Stock options let you buy shares at a set price, while an ESPP generally lets you purchase company shares through payroll deductions, sometimes at a discount.
Secfi’s AI equity assistant, Maeve, can help you estimate exercise costs and potential taxes before you decide what to do.
Possible options include taking out a traditional loan, selling shares through a tender offer or secondary market, completing a cashless exercise when one is available, or using non-recourse financing. For eligible employees, Secfi’s non-recourse financing may cover the exercise cost and related taxes without putting other personal assets at risk.
Paying with cash lets you keep the full potential upside, but it also concentrates more of your own money in one illiquid company. Financing can help preserve your savings, although it may involve interest, fees, or sharing some future proceeds. Maeve can help you model the estimated costs and outcomes, while Secfi’s team can explain financing options that may be available.
There’s no risk-free method. Waiting for a cashless exercise may limit upfront financial risk, but it depends on a future liquidity event that may never happen. Non-recourse financing can limit the risk to your personal assets because repayment generally depends on a successful exit, although it comes with fees (which are only paid in the case of a successful exit) and may reduce your eventual upside. The right choice depends on your finances, timeline, and confidence in the company.
You may need to let the options expire, exercise only some of them, or explore another way to cover the cost. Your choices could include a loan, secondary sale, cashless exercise or non-recourse financing, depending on your company and eligibility.
It may also be worth checking whether your company allows early exercise or whether exercising a smaller number of options over time could fit your budget. Because your vesting schedule and post-termination exercise window may affect how long you have to decide, Maeve can help you estimate the total cost, and Secfi’s team can explain what options may be available.
The tool shown here uses artificial intelligence and is for illustrative purposes only and not necessarily indicative of future results and there is no guarantee that similar results can be achieved. The information provided by the tool is not professional advice and is not intended by Secfi, Inc., its affiliates, and Secfi representatives, to be deemed as investment, legal, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. Secfi does not review the accuracy or completeness of the information provided to us within the tool.