What happens to stock options if my company never goes public?
8 min
Tim’s a CFP® at Secfi. He specializes in helping tech professionals navigate the complexities of equity compensation and integrate it into their holistic financial plans.
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Tim’s a CFP® at Secfi. He specializes in helping tech professionals navigate the complexities of equity compensation and integrate it into their holistic financial plans.
Stock options can be an exciting part of your compensation when you join a promising startup. But at some point, you may start wondering: what happens to my stock options if the company never goes public?
Maybe:
The good news is that going public isn't the only way your stock options can become valuable. But no outcome is guaranteed, so it's always worth planning for different possibilities.
Fortunately, there are ways to mitigate risk in most scenarios, while still giving you a chance to participate in potential upside. For example, if you use non-recourse financing to exercise stock options, you don't need to use any of your own cash or put your personal assets at risk.
In this article, we'll cover:
What happens to stock options if your company never goes public
If your company stays private, you may have to wait longer for liquidity
If your company offers a tender or secondary sale, you may still be able to access liquidity
If your company fails, your options or shares may become worthless
If your company gets acquired, your payout depends on the terms of the deal
How to manage the risk that your company might never go public
How Secfi can help you plan for different outcomes
How Joe reduced the personal risk of exercising his Confluent stock options with Secfi
If you're trying to decide whether exercising makes sense, Secfi can help you model different outcomes before you commit your cash with our free AI equity assistant Maeve.
If your company never goes public, your stock options don't automatically become worthless. We've summarized some of the more likely events below, and we'll go through them in more detail shortly.
| What happens to the company? | What could happen to your stock options or shares? |
|---|---|
The company stays private | You may have to wait for another liquidity opportunity, such as an acquisition or tender offer. |
The company offers a tender | You may be able to sell some of your shares while the company is still private, depending on company approval, buyer demand, and the terms of the sale. |
The company fails | Unexercised options may become worthless. If you've already exercised, the shares you bought may also end up worth little or nothing. |
The company is acquired | Your options or shares may be cashed out, converted, or otherwise handled as part of the deal. How much you receive can depend on the acquisition price and the rights of other shareholders. |
Try using our AI equity assistant Maeve to model these potential scenarios using your company and grant information. Instead of thinking about them only in the abstract, you can compare how waiting, exercising, or a lower-than-expected exit could affect your own equity.
As you consider the different outcomes below, one option worth knowing about is non-recourse financing. For eligible startup employees, it can help cover the cost of exercising stock options and associated taxes without requiring you to put your own cash at risk.
Unlike a traditional personal loan, non-recourse financing is tied to your equity rather than your other personal assets.
With a financing company like Secfi, repayment is generally due after a successful liquidity event, so there's no monthly payment like a regular loan. If there's no successful exit, we bear the costs; your other personal assets aren't used to make up the shortfall.
You also retain ownership of the shares you exercise, which means you can still participate in potential future upside if the company eventually has a successful exit. Non-recourse financing isn't available for every company or employee, but it can change the downside in some of the scenarios we'll walk through below. Always, remember there may be some tax consequences with non-recourse financing so always talk to your tax professional regarding your particular circumstance
Learn more about non-recourse financing.
Your company can remain private for years without your stock options becoming worthless. The bigger issue is that you may not have a clear way to turn their potential value into cash.
If you haven't exercised yet, you can generally continue holding your vested options while you're employed, subject to the terms and expiration date of your grant. You may also choose to exercise some or all of them while the company is still private.
If you do exercise, you'll own private company shares. Those shares could increase in value if the company continues to grow, but there's no guarantee you'll be able to sell them when you want to.
That can make the decision to exercise tricky. Exercising earlier may let you start certain tax holding periods sooner and, depending on your option type and the company's valuation, could reduce some future tax exposure. But you're also putting money into an illiquid investment that may never produce a return.
Waiting keeps your cash available and gives you more time to see how the company performs. However, exercising could become more expensive if your company's 409A valuation rises, and leaving the company may also give you a shorter window to decide what to do with your vested options.
Even if your company never goes public, you may still get an opportunity to turn some of your equity into cash while it remains private.
One possibility is a tender offer. This is usually organized by the company and gives eligible employees or shareholders a limited window to sell some of their shares, often to existing or new investors.
You may also be able to sell shares through the secondary market. In this case, a buyer purchases your private company shares before an IPO or acquisition. Whether this is available to you can depend on factors such as company approval, buyer demand, and how many shares you want to sell.
If you've already exercised your options, these liquidity opportunities can help reduce how much of your wealth is tied up in one private company. You may decide to sell only a portion of your shares and keep the rest, giving you some cash today while preserving some potential future upside.
The tradeoff is that private shares don't always sell at the company's latest headline valuation. The price you can get depends on the market for your company's shares and the terms buyers are willing to offer.
The worst-case scenario is that your company runs out of money or becomes insolvent before reaching a successful liquidity event.
If you still hold unexercised stock options, those options may ultimately become worthless. If you've already exercised, you own common shares in the company, which could also fall to little or no value.
The second situation can be especially painful because you may have already spent a lot of your own money exercising your options and paying associated taxes. There are some ways to get back tax credits, but it's painful nonetheless.
Here's what that could look like. We're using real and rounded numbers to respect those who worked so hard to build their dreams and didn't have the outcome expected.
Susan is single, lives in California, and earns $200,000 per year as an engineer at a promising startup. She's granted 200,000 incentive stock options (ISOs) at a $1.50 strike price.
When she decides to exercise her stock options, they have a 409A valuation, also known as fair market value (FMV), of $3 per share.
Susan pays her company $300,000 to exercise her shares:
200,000 shares × $1.50 strike price = $300,000
Those 200,000 shares are worth $600,000 on paper based on the company's fair market value:
200,000 shares × $3 FMV= $600,000
The $300,000 difference between what Susan paid and the shares' fair market value is included in her AMT calculation. In this example, that results in Susan paying another $100,000 in combined state and federal taxes.
Susan has now spent $400,000 to exercise her stock options and cover the associated taxes, hoping the shares will eventually be worth considerably more after a successful exit.
Unfortunately, the company's growth stalls. Investors are unwilling to provide more capital, and the company eventually becomes insolvent.
Susan's common shares are now worth $0. She can't recover the $300,000 she paid to exercise her options, although she may be able to claim certain tax benefits.
The $300,000 Susan paid to exercise becomes part of the tax basis of her shares. If those shares become worthless for tax purposes, she may be able to recognize a capital loss, subject to applicable tax rules and limitations.
She may also have an AMT credit related to the additional AMT she paid when exercising her ISOs. Recovering that credit can take time, depending on her future tax situation.
The bigger point is that exercising private-company stock options means putting money into an investment whose future value and liquidity aren't guaranteed. That doesn't mean exercising is necessarily the wrong choice. Exercising earlier can have big tax advantages and let you participate in future growth, and non-recourse financing can help you do so without using up cash you'd rather keep for other expenses or investments.
This is one situation where non-recourse financing can change the downside. If Susan had qualified for financing to cover some or all of her exercise costs and associated taxes, less of her own cash would have been exposed if the company ultimately failed.
An acquisition can give you a way to turn your equity into cash without the company ever going public. But what happens to your equity depends on the terms of the deal.
Valuing a publicly traded company is relatively straightforward: investors buy and sell shares on the public market, creating a visible market price.
Valuing a private startup is harder. A company's valuation is heavily influenced by the prices investors are willing to pay during each funding round.
When investors put money into a startup, they often receive preferred stock, a class of shares that can come with rights that common stockholders don't have. Employees who exercise stock options, on the other hand, generally receive common stock.
One of the most important differences can show up during a liquidity event such as an acquisition. Preferred shareholders may have liquidation preferences that allow them to receive their investment back, and sometimes more, before common shareholders receive anything.
For example, let's say a venture capitalist invested $100 million in your startup at a $1 billion valuation. If the company later gets sold for $200 million, the investor may have rights to the first $100 million because they hold preferred shares. The remaining $100 million would then be available to other shareholders, subject to the terms of the company's capitalization and acquisition.
This is only an example, as is the example with Susan shared below. Always check with a qualified professional before making major financial decisions.
Now let's imagine Susan's company doesn't fail. Instead, it gets acquired for $500 million.
That sounds like a much better outcome. But the acquisition price alone doesn't tell you how much common shareholders will actually receive.
As we saw earlier, Susan spent $400,000 exercising her options and paying the associated taxes. Her company had also raised $400 million from investors, who held preferred shares.
If those investors were entitled to receive their $400 million back first under the terms of the deal, only $100 million of the $500 million acquisition price would remain for other shareholders.
In the original example, that worked out to around 50 cents per common share. Susan's 200,000 shares would therefore be worth about $100,000.
So although her company successfully exited, Susan would still have lost around $300,000 compared with the $400,000 she originally spent exercising and paying taxes.
This is why a successful acquisition unfortunately doesn't necessarily mean a successful outcome for every employee shareholder.
There's no single right way to handle stock options when the exit timeline is uncertain. A few approaches to consider:
Model different exit values and timelines. Looking at best-case, middle-case, and downside scenarios with Maeve can help you see how exercise costs, taxes, and potential returns change.
Wait and keep your cash available. This gives you more time to see how the company performs, although exercising could become more expensive later.
Compare using personal cash with financing. Non-recourse financing may help eligible employees cover exercise costs and associated taxes without putting unrelated personal assets at risk.
Exercise only part of your grant. You can limit how much of your own money is tied up in private shares while still keeping some exposure to potential future upside.
If you've already exercised, focus on liquidity and concentration risk. You may want to explore secondary-sale opportunities and plan to manage how much of your net worth is tied up in one private company.
Factor in what happens if you leave the company. Your post-termination exercise window may significantly shorten the amount of time you have to decide what to do with vested options.
Secfi provides equity planning experience and financing for startup employees and executives. We've supported thousands of startup employees and worked with employees from more than 50 U.S. unicorns.
Our team includes equity strategists and Certified Financial Planners® with personal and professional experience across company valuations and private equity.
Here's why employees and executives from companies including Stripe, DoorDash, and Reddit work with Secfi.
Comparing different scenarios can get complicated fast, which is why we found generic online calculators or LLMs often weren't equipped to help many startup employees.
We purpose-built Maeve so you can model and get suggestions based on your specific situation. Maeve can connect directly to your Carta account so you can get started in seconds, or you can upload or manually provide your grant information. You can also check Maeve's assumptions when you want to better understand what it shares with you.
Maeve lets you model exercise costs, potential AMT and taxes, different exercise dates, and possible exit outcomes rather than relying on a single assumed IPO scenario.
For example, you could compare what happens if you exercise everything today, exercise only part of your grant, wait another year, or assume the company exits at a lower value than expected. That helps you see what you could lose or gain in each scenario before you make a decision.
For illustrative purposes only. Actual results may vary and there is no guarantee of any particular outcome.
If you decide exercising makes sense but don't want to fund the full exercise and tax cost yourself, Secfi offers non-recourse financing to eligible employees.
You retain ownership of the shares you exercise, so you can still participate in potential future upside. You can also combine financing with your own cash rather than treating the decision as all-or-nothing. For example, you might decide how much of your savings you're comfortable investing personally, then explore financing for another portion of the exercise.
Repayment is tied to the terms of the financing agreement and a future liquidity event. If there's no successful exit, we bear the downside covered by the financing rather than pursuing your other personal assets like your home or savings. We're able to do this because we're selective about the companies we can finance.
Another potential advantage of non-recourse financing is that it typically doesn't impact your debt-to-income ratio. That often makes it easier if you ever want to take out a mortgage or personal line of credit, compared to if you financed your options exercise with a traditional loan.
Most tax and financial planners you meet are good at what they do, but they don't typically work with AMT, tender offers, and other startup equity situations. That's why Secfi Wealth brings together a team of Certified Financial Planners® who are passionate about the unique situations that startup employees face.
Even if non-recourse financing and exercising your options isn't the right choice for you, our team can advise and help you plan for different scenarios. Our advisors have a fiduciary duty to act in clients' best interests, and don't get any kickbacks or commissions.
An advisor can help you think through questions such as how much of your net worth you're comfortable holding in one private company, whether exercising in stages makes sense, how an exercise could affect your taxes, and how your equity fits alongside goals such as buying a home, investing, planning for your children's education, or planning for retirement.
We're also able to support secondary sales in some cases, and provide company-wide equity education so startups can help their employees understand and prepare for different outcomes.
When Joe left Confluent, he had just 90 days to decide whether to exercise his stock options or let them expire. He could have sold investments or used his savings to cover the exercise cost and potential taxes, but he wasn't comfortable taking that much personal financial risk.
Instead, Joe used Secfi's non-recourse financing to exercise his options. That allowed him to keep his Confluent shares and participate in any future upside without putting his other personal assets at risk if the company never had a successful exit. As Joe put it, "Letting an investor take a risk for a share of the upside made a lot of sense to me."
Confluent later went public, and Joe was able to benefit from having exercised his shares. His situation is a useful example of how non-recourse financing can change the downside of an exercise decision when you believe in the company's potential but aren't sure if it will ever have a successful exit.
Read the full case study: Why Joe financed his stock options exercise after leaving Confluent with non-recourse funding.
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.
You can't know exactly which outcomes will happen for you and your company, so it helps to understand what each scenario could mean and plan in a way that makes sense for your goals and risk profile.
At Secfi, we've provided equity advice to over 55,000 startup employees, and over $800 million in non-recourse financing.
Try Maeve, our AI equity assistant to model your stock options and explore how different exercise and exit scenarios could affect your equity. And if you'd rather talk through your situation with a person who gets it, get in touch with Secfi's team.
If you exercise your stock options and the company doesn't go public, you'll own private company shares. Those shares may still have value, but you may have to wait for another liquidity event, such as an acquisition, tender offer, or secondary sale, before you can turn that value into cash.
There's also a risk that the company's value falls or the shares ultimately become worthless. That's why it's worth considering how much cash you're comfortable putting into an illiquid investment before exercising. Secfi's AI equity assistant, Maeve, can help you model different exercise costs and exit outcomes using your own grant information.
The $100,000 rule applies to incentive stock options (ISOs). Under current U.S. tax rules, only up to $100,000 worth of stock underlying ISOs can first become exercisable in a calendar year and retain ISO treatment. The limit is based on the fair market value of the shares when the options were granted, not their value when you exercise them.
If options above that limit first become exercisable in the same year, the excess is generally treated as non-qualified stock options (NSOs) for tax purposes. Because ISO and NSO tax treatment differs, it's worth checking your grant details and speaking with a tax professional if the $100,000 limit may apply to you.
If a publicly traded company goes private, what happens to your equity compensation, including employee stock options, depends on the terms of the transaction and the company's stock plan. Your options may be cashed out, converted into another form of equity, canceled in exchange for consideration, or handled differently depending on whether they're vested.
Alternatively, if your startup stays private rather than going public, your options don't automatically disappear. They can remain outstanding until you exercise them, they expire, or another company event affects them. If you've already exercised, you'll continue to own private shares unless they're sold or otherwise affected by a transaction.
In either case, Secfi's Wealth Team can help you navigate your equity and related financial decisions.
Stock options at a non-public company give you the right to buy company shares at a predetermined strike price, usually according to a vesting schedule. Exercising means paying the strike price to turn those options into private company shares.
Because the company isn't publicly traded, you generally can't sell those shares on a public stock exchange. You may need to wait for an initial public offering (IPO), acquisition, tender offer, secondary sale, or another liquidity event. Exercising can also create tax consequences, particularly with ISOs and alternative minimum tax (AMT). Maeve can help you estimate exercise costs and taxes and compare different scenarios before you decide what to do.
Maybe, but an IPO shouldn't be treated as guaranteed. Before exercising, consider the exercise price, potential taxes, how much of your own cash would be tied up, your option expiration date, the company's outlook, and how long you may have to wait for liquidity.
You also don't necessarily have to choose between exercising your entire grant and doing nothing. You could exercise only part of your options, wait for more information, or explore non-recourse financing if you're eligible. Secfi and Maeve can help you model different scenarios so you can compare the potential downside and upside before making a decision.
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.