Your options will have a vesting date and an expiration date. You cannot exercise your options before the vesting date or after the expiration date. There are a few ways you can do this:. There are two types of stock options companies issue to their employees:. Different tax rules apply to each type of option. This is not necessarily the case for incentive stock options. With proper tax planning, you can minimize the tax impact of exercising your options. Your employee stock option plan will have a plan document that spells out the rules that apply to your options.

Get a copy of this plan document and read it, or hire a financial planner that is familiar with these types of plans to assist you. There are many factors to consider in deciding when to exercise your options. Investment risk, tax planning, and market volatility are a few of them, but the most important factor is your personal financial circumstances, which may be different than those of your co-worker.

Keeping too much company stock is considered risky. Corporate executives need to consider this in their planning and work to diversify out of company stock. Securities and Exchange Commission. Fidelity Investments. Accessed Feb. In earlier stage private companies , there may be little or no profit, but the company may seem valuable because of high expectations that it can make future profit or be acquired.

If a company like this takes money from investors, the investors determine the price they pay based on these educated guesses and market conditions. In startups there tends to be a high degree of uncertainty about the future value of equity, while in later stage private companies financials are better understood at least to investors and others with an inside view of the company , and these predictions are often more certain. Ultimately, the value of your equity depends on whether and when you are able to convert it into stock that you sell for cash. With public companies , the answer is relatively easy to estimate—as long as there are no restrictions on your ability to sell, you know the current market value of the stock you own or might own.

What about private companies?

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A liquidity event is usually what makes it possible for shareholders in a private company to sell their stock. However, individuals may sometimes be able to gain liquidity while a company is still private. This is in contrast to primary market transactions, where companies sell directly to investors. Secondary sales are not routine, but they can sometimes occur, such as when an employee sells to an accredited investor who wants to invest in the company.

While those who hold private stock may hope or expect they need only find a willing buyer, in practice secondary sales only work out in a few situations.

EXECUTIVE COMPENSATION

Unlike a transaction on a public exchange, the buyer and seller of private company stock are not in total control of the sale. There are a few reasons why companies may not support secondary sales :. Historically, startups have seen little purpose in letting current employees sell their stock, since they prefer employees hold their stock and work to make it more valuable by improving the value of the company as a whole.

Former employees and other shareholders often have difficulty initiating secondary transactions with a company. Companies must consider whether sales could influence their A valuation. Secondary sales are an administrative and legal burden that may not make it to the top of the list of priorities for busy startup CEOs and CFOs. SharesPost , Forge , and EquityZen have sought to establish a market around secondary sales , particularly for well-known pre- IPO companies.

Why Not Stock or Options?

A few other secondary firms have emerged that have interest in certain purchases, especially for larger secondary sales from founders, early employees, or executives. A company can work with a firm to facilitate multiple transactions. In some cases, an employee may have luck selling stock privately to an individual, like a board member or former executive, who wishes to increase their ownership. Further discussion can be found on Quora. 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:. Before vesting if early exercise is available to you.

After leaving the company, as long as the exercise window is open. Wait until acquisition.

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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. 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.

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. You need to understand the type of stock grant or stock option in detail, as well as what it means for your taxes, to know what your equity is worth. Avoid doing everything yourself, but also avoid blindly trusting advisors without having them explain the details to you in a way you understand. Next, we offer more details on what to ask about your offer, and how to negotiate to get the answers you want.

How to value your equity

When a company offers any form of equity as part of its compensation package, there is a whole new set of factors for a prospective employee to consider. This chapter will help you prepare for negotiating a job offer that includes equity, covering negotiation tips and expectations, and specific reminders on what you can ask and what is negotiable when it comes to equity. There is a lot at stake, and it can be uncomfortable and stressful to ask for things you need or want.

Negotiations ask you to focus on what you actually want. What is important to you—personal growth, career growth, impact, recognition, cash, ownership, teamwork? Not being clear with yourself on what your priorities really are is a recipe for dissatisfaction later. The negotiation process itself can teach you a lot about a company and your future manager. But we can cover the basics of what to expect with offers, and advise candidates on how to approach negotiations. More effort is needed to end biases and close the wage gap.

All candidates should take the time to understand their worth and the specific value they can add to a company, so that they are fully prepared to negotiate for a better offer.

Many companies will give some leeway during negotiations , letting you indicate whether you prefer higher salary or higher equity. Candidates with competing offers almost always have more leverage and get better offers. For very early stage startups, risk is higher, offers can be more highly variable, and variation among companies will be greater, particularly when it comes to equity.

If no funding has been raised, large equity may be needed to get early team members to work for very little or for free. Once significant funding of an A round is in place, most people will take typical or moderately discounted salaries.