Editor’s note: A version of this question originally appeared on Reddit.
I’ve been working at my startup for nearly four years, and I’m getting ready to vest the last of my 15,000 stock options. I joined the company when the strike price was 16 cents per share, so it’ll cost me around $2,400 to exercise all my shares.
We’re growing, and our revenue is good, although the company has unsuccessfully tried to sell itself for several years. We have external investors, but an IPO seems unlikely. Should I exercise my stock options, or park my money in a safer investment?
I’m not sure what percentage of ownership I hold, or how much the shares would be worth on a secondary market.
Yours is a very common question that many employees face: Does it make sense to exercise my stock options now?
I’d suggest you start by taking a look at your company’s current 409A valuation (also known as fair market value), which you can find in your stock option administration platform or through your company itself.
You said that your strike price is 16 cents per share, so taking a look at the company’s current 409A valuation will start to give you a rough idea of how much those shares are worth.
Private companies that issue stock regularly perform 409A valuations with a third-party valuation company to determine the current value of each individual share. That helps them set expectations with employees who are exercising their stock options, investors thinking about putting money into the company, and for tax purposes.
If, for example, you find that the 409A valuation estimates that your shares are currently worth $1 each, you’ll know that your 15,000 shares will cost $2,400 to exercise, and carry an assumed value of $15,000.
Remember: When it’s time to exercise your stock options, you’ll not only pay the exercise cost (in your case, 15,000 shares x 0.16 cents each), but you may also owe taxes on the difference between your strike price and the company’s 409A valuation.
There may be tax benefits to exercising your stock options now, rather than waiting until the 409A valuation grows again. The other big benefit to exercising now is that you’ll start the clock on long-term capital gains.
This is the calculated risk that every employee takes when they decide to exercise their stock options — will the company successfully exit, or will it fail?
In general, you should evaluate the value of your stock options like any other investment:
- If I was given the chance, would I purchase this private company’s shares at this price?
- How much of my net worth is tied up in a single asset?
- Do I have confidence that this company will successfully exit?
- What is the potential cost of waiting to exercise my stock options?
These are all good questions to talk over with your CPA or licensed financial professional.
- Vieje Piauwasdy, Director of Equity Strategy, Secfi
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