You’ve exercised your employee stock options — now what?
Exercising employee stock options is like purchasing shares in any other company. You now own a small piece of equity in your employer, and it’s up to you to decide how and when you will sell those shares, ideally at a profit.
First, let’s talk about the mechanics of turning stock options into shares you can sell.
You likely exercised your stock options using a stock option administration platform, like Carta or Shareworks. Once you exercise your shares, and the company approves the exercise, Carta will issue you a stock certificate that details how many shares you own, and at what price.
If you want to sell your shares, you’ll need to transfer them before you can do so. If you end up selling your shares on a secondary marketplace or in a tender offer, you’ll need to tell your stock option administration platform who you’d like to transfer the shares to.
If your company is going public, you’ll need to transfer your shares out of the stock option administration platform and into a brokerage account before you can sell your shares on the open market.
If your company is acquired, the company will typically facilitate the transfer of your shares to its new owner, in return for cash, stock, or a combination of the two.
Once you own your shares, you’ll need to make a decision on when to sell them, and at what price. There can be tax benefits to holding on to your shares for long enough to take advantage of long-term capital gains.
Here are two common scenarios, and their related tax implications:
- Exercise stock options, and sell them within 12 months of exercising: Exercising your stock options and selling them within 12 months will very likely subject you to the short-term capital gains tax rate.
- Exercise stock options, and hold onto them for more than 12 months before selling: Exercising your stock options and holding onto them for at least a year before selling them will likely subject you to the long-term capital gains tax rate, which is lower than ordinary income tax rates. Note: If you’re exercising incentive stock options (ISOs), you’ll need to also hold onto the shares for at least two years after they were granted to qualify for the long-term capital gains tax rate.
Deciding if and when to sell your shares is a highly personal decision; consult with a financial professional for personalized advice.