No matter what type of options you have, they need to pass four stages to do so. You applied, nailed the interviews, accepted the offer and started working. You now have options — but not really.

You get your options unvested. Unvested options need to vest again, just jargon for you actually getting them , a process that takes years.

How many? The most common vesting scheme takes 4 years, with a 1-year cliff. Well, an option still isn't really anything, except the permission to buy a share : a tiny piece of your company. Buying shares is called exercising your options. Although stock options are a form of compensation, you need to spend money before they make you money. To exercise, you need to pay their strike price the price your employer offers you to buy the shares for as well as income tax.

The strike price is set when you join the company, but the amount of tax varies. When you exercise your options, it really just means buying your shares. You now have a stake in the company — that's the percentage of it that you own. It has potential future value, but since your company is private, you can't sell it on the public stock market. Until your company exits which means going public or getting bought by another company your shares won't make you money. When you decide to exercise is up to you. As long as you work for the company you can buy shares whenever you like, and you don't have to buy them all at once.

If you leave the company, you'll usually have 90 days to exercise a few companies extend this to 5, 7 or 10 years. You could wait to exercise until the exit, then cover the costs with the money you make, and have no upfront costs. But that strategy also has its drawbacks. Which strategy you follow is a big decision.

We'll cover how to decide what's best for you later on. Is acquired , meaning it gets bought by another company. Goes public , meaning it sells its shares on the public stock market in an initial public offering IPO for short. That's what Slack, Uber and Lyft did. There's usually a 'lock-up' period of 90 or days after the IPO, where employees can't sell their shares.

When we say exit, we mean the first date you can sell your shares, not the actual date the company IPOs. If the exit value of the company is high enough more on that in a bit then you can sell your shares to make a profit. Hello payday! This is the moment founders and investors have been waiting for — their business model is making money through exits. The Option Lifecycle explains how stock options can make you money.

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But how much money? What things affect your profit? When your company exits, a bunch of money is offered to everyone who owns equity: founders, investors, your colleagues — and you. Some key terms:. The exit value is the total amount of money offered to everyone who has equity. Your payout is the part of it that you get. But there are costs, like taxes. Your profit is money you make after costs — the net amount. Exit values range from tens of millions to billions of dollars.

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A few companies even reach the tens of billions. You can try to predict the exit value for your company, but until it actually happens, you can't know it for sure. We'll talk about how to deal with this uncertainty in a bit. When payday comes, the exit value is divided among everyone with equity.

The part that you get your payout is the percentage of the company you own at that time your stake. Your stake today is the number of shares you own, divided by the total number of existing company shares. So if you own , shares and your company has 50,,, your stake is 0. Your company should tell you the total number of existing shares they have, otherwise it's impossible to know what yours are worth.

Your stake at the time of exit , unfortunately, is probably not the same as your stake today. As your company creates new shares for new employees and investors, your stake slowly goes down. This is called dilution. To work out your payout, you multiply the exit value of your company by your diluted stake.

Tax Planning for When Your Startup is Acquired

The problem? It's how much your stake will dilute by, but we'll cover how to manage that uncertainty later on. With dilution, your company creates new shares to give to new employees and investors. As a result, there are more company shares in total. So even though you still own the same number of shares, your stake — the percentage of the company that you own — decreases. To continue the above example, if you own , shares and there are 50,, existing company shares, your stake is 0.

What Happens to Stock Options After a Company is Acquired?

If your company then creates another 50,, shares for new investors, the number of shares grows to ,,, diluting your stake to 0. Because if your stake is halved, but new investments let your company quadruple its exit value, your payout is actually doubled. In Exit Pie terms: you'd get a smaller part of a bigger pie, and end up with more calories down the line yum. The strike price is the price of your shares which you pay to your company when you buy them.

When the company granted your options, they set the price per share. To get the total strike price, multiply the price per share by the number of options. Taxes are more complicated and depend on when you exercise: wait until your company exits to exercise, or do it before the exit. The only time you need to pay is when your company exits. You sell your shares, pay the strike price, pay your ordinary income tax and keep the profit. Overall, your taxes might be lower. But you pay them in two parts: at first when you exercise, and then when you sell your shares on exit.

Once you know your payout, our free Profit Simulator can compute your costs, and tell you your profit. You probably know the feeling of traveling to a country with a different currency. It's the same for exit values. If your first reaction is, 'I have no clue', you need to build exit intuition. Coming up with a single estimate is futile — it would almost certainly be wrong.

Nothing wild happens here — it should be slightly optimistic.