Stock Option Scenarios — from The Holloway Guide to Equity Compensation

The following excerpt is from The Holloway Guide to Equity Compensation, a detailed reference with hundreds of resources on stock options, RSUs, job offers, taxes, and more. You can read more from this excerpt, or access the full guide text here.

THE FULL VERSION OF THIS GUIDE ANSWERS QUESTIONS LIKE:

What are the benefits of waiting until acquisition to exercise?

When should I exercise my options?

How does a cashless exercise work?

The big decisions to be made regarding stock options are when should you exercise and, if you can, when should you sell? Here we lay out common scenarios that might apply to you. Learning from these scenarios and their outcomes can help you evaluate your position and decide what you should do with your stock options.

• Exercise and hold. You can write the company a check and pay 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.
• Recall that the window is likely to close soon after you leave a company, often 90 days after termination.
• 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.
• 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 in a prior section, your shares could be worth next to nothing unless the sale price exceeds the liquidation overhang.
• 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.

Take note that some of the above situations may require significant up-front cash, so be sure to do the math early. If you are in a tight spot wherein 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.