What information do I need when exercising stock options?
4 min
Note: If you hold RSUs rather than stock options, you typically won't need to make an exercise decision. At private companies, RSUs may be structured as either single-trigger or double-trigger RSUs, which can affect when shares are delivered and when taxes are due.
ISOs are the most common for startups and pre-IPO companies. But it’s becoming common for later stage startups to switch to RSUs before going public. If you’ve received multiple grants during your employment, you’ll want to check all grants for the type of options you received in each.
If you’ve left the company and received a post-termination exercise window of longer than 90 days — sometimes 3 or 5 years, all the way up to 10 years — it’s likely that your ISOs have converted to NSO’s. You should be able to check this wherever your equity is managed.
There could be exercise and tax strategies based on your financial and tax situation. For example, you may be able to avoid AMT if the strike price and fair market value are the same (a benefit of early exercising). Or, you may be able to exercise a certain portion each year without paying AMT.
For more information read: The complete guide to employee stock option taxes.
2. Determine how many of your options are available to exercise
Before you calculate the cost of exercising, you need to know how many options are actually available to you.
In most cases, you can only exercise options that have vested. Your vesting schedule should be listed in your stock option grant or equity management platform.
A common vesting schedule is four years with a one-year cliff. That means you receive 25% of your options after your first year at the company, then the rest vest gradually over the next three years.
For illustrative purposes only. Actual results may vary and there is no guarantee of any particular outcome.
For example, if you were granted 20,000 stock options on a four-year vesting schedule with a one-year cliff, you’d usually have 5,000 vested options after your first year. After that, more options would become available each month.
(Note that this is just an example, and it’s important that you speak to a qualified tax professional regarding your particular circumstance.)
Some companies use different vesting schedules, especially later-stage companies. So don’t assume yours follows the standard four-year schedule. Check your grant documents to confirm how many options have vested and when the rest are due to vest.
To learn more, check out our article: What is a stock option vesting schedule?
Some companies also allow early exercise. This means you may be able to exercise your options before they vest. If your company allows this, you may want to file an 83(b) election within 30 days of exercising. This can have major tax implications, so it’s worth speaking with a tax professional before doing it.
3. Estimate the base cost of exercising your options
Once you know how many options you can exercise, you can estimate the base cost:
Number of options you want to exercise × strike price = base exercise cost
But this does not include taxes. Depending on the type of stock options you have and the company’s current fair market value, your total cost may be much higher.
If you want a more detailed estimate, try our AI equity assistant Maeve which can model different scenarios, including taxes.
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
4. Compile your current tax and financial situation data for a full picture
Beyond the documents immediately relevant to exercising stock options, you’ll need to figure out your current tax and financial situation. Information you should bring together includes:
- Your most recent tax return
- Your expected income for the year
- Your filing status and official state of residence
- Any major deductions or credits you expect to claim
- Your current savings and emergency fund
- Existing debts, such as a mortgage, student loans, car loan, or personal loans
- Any major upcoming expenses, such as buying a home, having a child, moving, or leaving your job
- Any other major investments you already hold
When you have all of that information together, you can decide your comfort level with investing in your stock options.
5. Decide if you want financing for exercising stock options
Exercising stock options can set you up for big financial gains if your company performs well, but it can be expensive once you include taxes.
For example, imagine you have 10,000 stock options with a $2 strike price, and your company’s current fair market value is $12 per share.
The exercise cost alone would be:
10,000 × $2 = $20,000
But if your exercise also triggers taxes on the $10 spread between the strike price and fair market value, your tax bill could add tens of thousands of dollars more, depending on your option type and tax situation.
In this example, your total upfront cost could increase from $20,000 to $50,000 or more once taxes are included.
That’s why many startup employees and executives look into financing options when deciding whether to exercise.
If the cost is too high to pay out of pocket, you may want to look into financing options.
Traditional financing options, such as a personal loan or line of credit, may help cover the upfront cost of exercising. But they usually come with personal repayment obligations. That means you may still need to repay the loan, plus interest, even if your company delays its exit, loses value, or never exits at all.
Non-recourse financing from companies like Secfi works differently. Instead of relying on your personal assets for repayment, the financing is tied to the value of your shares. If there’s a successful exit, you repay the financed amount plus fees. If there’s no exit or your shares become worthless, you don’t owe the financed amount back.
Why partner with Secfi when exercising stock options
Gathering the right information is a useful starting point, but making decisions around exercising stock options can still be intimidating.
That’s why Secfi was created. Our founders wanted to exercise their options, but didn’t have the cash or knowledge to make the best choices possible.
Secfi helps startup executives and employees understand their equity, access more liquidity, model different exercise scenarios, and explore ways to exercise without putting too much of your own cash at risk.
Use Maeve to understand your equity without digging through every document yourself
Maeve is Secfi’s AI assistant built for equity. It helps you understand your stock options, answer questions about your equity, and model different exercise scenarios based on your situation.
If you use Carta, you can securely connect your account to the Secfi platform so Maeve can access the information needed to help you analyze your equity. That may include details such as your grants, strike price, vesting schedule, and company valuation information like 409A updates.
If you don’t use Carta, you can upload your equity documents directly to the platform instead. Maeve can extract the relevant information so you don’t have to manually sort through grant paperwork yourself.
Once Maeve has the relevant details, you can ask questions like:
- How much would it cost to exercise my stock options?
- Could exercising trigger taxes?
- What happens if I exercise now versus later?
- How many options could I exercise based on my current situation?