Frequently Asked Questions

The first determinant is whether the stock’s fair market value exceeds your strike price. If it doesn’t, there’s generally no point in exercising vested options; if you wanted to purchase any shares, you’d be better off buying them on the open market. Beyond that, it helps to have a strategy of deciding when it’s a good time to exercise your NQSOs. Having a strategy will help you decide whether to (i) wait until the options approach their expiration date, (ii) set a price at which you’ve achieved “enough,” (iii) set up an automatic process for exercising your options over time, or (iv) exercise as early as possible to minimize the tax ramifications. You also may decide to mix and match these strategies into a tailored solution that offers you the highest likelihood of successfully meeting your personal financial goals.

Yes, holding too many options or shares (as a percentage of your total wealth) can expose you to concentration risk. Having too much of your money is a single stock increases the risk that, if the stock price goes down, you might lose a significant portion of your worth. If you have enough assets or earning capacity elsewhere, you may decide to tolerate a higher degree of concentration risk with your equity compensation, hoping to “strike it rich.” On the other hand, if your financial well-being depends on keeping profits already achieved, it may be time to reduce your stock and stock option concentration risks. A general rule of thumb is to avoid having your company stock + options exceed 10–15% of your total wealth.

There is no universally correct answer for whether to exercise your ISOs pre- or post-IPO. Either approach has advantages and disadvantages, with outcomes that depend on a future nobody can predict. The best decision for you hinges on individual tax considerations, your personal circumstances, and how your options mesh with your greater financial plans.

If you exercise pre-IPO and the stock appreciates, you could score a lower upfront AMT bill, and start your qualifying disposition holding period sooner than later. This can give you favorable tax rates when you sell the stock. However, a pre-IPO exercise also has its disadvantages. You could be left holding unsellable stock of low or no value if the IPO never occurs, or the share price declines.

Essentially, your ISOs could end up being worth anywhere from a vast fortune … to nothing at all. Either way, it is usually hard to value or sell exercised ISO shares until after your company has completed its IPO. And there’s never a guarantee an IPO will come soon, or indeed, ever. Your company may instead secure private funding to fuel its growth, or it may not grow to the point that warrants an IPO. Even once an IPO is in the works, it could be delayed or canceled if market conditions change. Given the uncertainty, we recommend including a healthy dose of contingency planning in your financial plans.

Once your company completes its IPO, there is usually a lockup period, during which you probably won’t be able to sell any of your shares. It depends on the agreement your company has with the investment bank helping your firm go public, but a typical lockup period includes the six months following the IPO.

Some companies may offer an early lock up release as part of a standard lockup. An early lock up release may allow for limited ability to sell a portion of equity if and when certain metrics are obtained. Not all companies offer this, and the rules can be specific, so you’ll want to check your plan agreement to know the details.

If you exercise your ISOs post-IPO, you can trade your purchased shares on a public exchange among a global forum of buyers and sellers. If you exercise and purchase shares pre-IPO, you will own shares of a non-public company, which you may or may not be able to sell to another party until the company completes its IPO. Even if you can sell pre-IPO shares, there may be significant restrictions, and it can be hard to determine their fair market value.

If you exercise your options and sell all the resulting shares at the same time, no additional taxes are incurred. If you exercise and hold any shares to sell at a future date, any profit you incur on that future sale will be taxed as a capital gain. Capital gains on shares held more than a year are taxed at more favorable long-term gain rates. Capital gains on shares held a year or less are taxed at short-term rates, which are currently the same as ordinary income tax rates.

You’ll want to check the specific terms of your offer, but you can generally exercise your NQSO any time after they vest. However, some companies may offer an early exercise provision that allows you to exercise before they vest.. You have until the expiration date, usually 10 years after vesting, after which any unexercised options will expire. So, in brief, you can exercise your NQSOs any time after they vest but before they expire.