My startup got acquired right after I left. What should I do with my stock options?
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Editor’s note: A version of this question originally appeared on Reddit.
A couple weeks after I quit my job, I learned that my old startup was being acquired. I have some vested stock options and I have a couple months to exercise them. It seems like the acquisition is going to happen, but you never know — especially now that I’m on the outside.
Should I exercise my stock options now, or wait until the sale gets finalized?
All my old coworkers are being told the acquiring company will pay them cash for their vested stock options once the deal gets finalized, and it’s unclear if the same deal is being extended to former employees like me. What should I do?
- Anonymous
Dear Anonymous,
I can totally empathize with your situation. A lot of startup employees ask themselves whether it makes sense to exercise their stock options when they leave their company. In your case, you have just a few months to make the decision, with the added complexity of this potential acquisition.
There are a couple things to figure out immediately:
Points #1 and #2 are connected. From your note, it sounds like you have only a couple of months to decide whether to exercise your options, which is consistent with the standard 90‑day post-termination exercise window that most startup employees face when they leave a company.
However, you may find that the company enacts a stock option exercise blackout period close to the acquisition, where people are not allowed to exercise, buy, or sell their options. That could significantly affect the timing of any decision you make, so it is important to review your stock option paperwork with a CPA or licensed financial advisor who understands startup equity and the related tax rules.
Points #3 and #4 really get at the larger question of acceptable risk and return. Your stock options administration platform — for example, Carta — will tell you your stock option strike price, and the fair market value of your stock, in the form of the latest 409A valuation (also known as fair market value).
Using that data, you can map out the cost of exercising your stock options. For example, let’s say you’ve vested 5,000 shares of incentive stock options (ISOs) at a strike price of $1 per share, and a 409A valuation of $5 per share:
In this example, if you exercised your shares, you would report a $20,000 gain for AMT purposes, which could push you into the alternative minimum tax depending on your income and the current AMT exemption and phaseout thresholds.
Note: You’ll be taxed differently if you hold a different type of stock options, like non-qualified stock options (NSOs) or restricted stock units (RSUs).
Once you know the cost to exercise, you’ll need to make a decision about whether the risk of exercising makes sense in light of your personal finances.
It sounds like this potential acquisition is still being negotiated, so it is impossible to know what the final terms of the deal will be, or even if the deal will go through at all. It might be an all-cash acquisition, a stock swap, a mixture of cash and stock, or some other combination, and each structure can lead to very different tax outcomes for your stock options.
These are good questions to explore with a CPA or licensed financial advisor who understands startup equity, stock options, and AMT. You might also try reaching out to your former employer or the acquiring company for more details about how your vested options will be treated. But do not wait too long, since you are likely facing a fixed exercise window and possible blackout periods that limit how long you have to decide.
- Vieje Piauwasdy, Director of Equity Strategy at Secfi
Have a question about your stock options or equity taxes? Email us at ask@secfi.com