Stock Option Scenarios

1 links
Holloway Guide ToEquity Compensation
Common questions covered here
How should I decide when to exercise my options?
How does a cashless exercise work?
What is the benefit of waiting until acquisition to exercise?

Stock Option Scenarios

The key decisions around stock options are when to exercise and, if you can, when to sell. Here we lay out some common scenarios that might apply to you. Considering these scenarios and their outcomes can help you evaluate your position and decide what you should do.

  • Exercise and hold. You can write the company a check and pay any taxes on the spread. You are then a stockholder, with a stock certificate that may have value in the future. As discussed, you may exercise:
    • Early, even immediately upon grant.
    • Before vesting (if early exercise is available to you).
    • Sometime after vesting.
    • After leaving the company, as long as the exercise window is open.
      • caution Recall that the window is likely to close soon after you leave a company, often 90 days after termination.
  • Wait until acquisition. If the company is acquired for a large multiple of the exercise price, you may then use your options to buy valuable stock. However, as discussed, your shares could be worth next to nothing unless the sale price exceeds the liquidation overhang.
  • caution Secondary market. As discussed, in some cases it’s possible to exercise and sell the stock in a private company directly to a private party. But this generally requires some cooperation from the company and is not something you can always count on.
  • Cashless exercise. In the event of an IPO, a broker can allow you to exercise all of your vested options and immediately sell a portion of them into the public market, removing the need for cash up front to exercise and pay taxes.

important Note that some of these scenarios may require significant cash up front, so it makes sense to do the math early. If you are in a tight spot, where you may lose valuable options altogether because you don’t have the cash to exercise, it’s worth exploring each of the scenarios above, or combinations of them, such as exercising and then selling a portion to pay taxes. In addition, there are a few funds and individual investors who may be able to front you the cash to exercise or pay taxes in return for an agreement to share profits.

Author and programmer Alex MacCaw explores a few more detailed scenarios.

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