Exercising options

Exercise means pay shares × strike to the company and receive shares (subject to vesting if you early-exercise). Until you exercise, you hold a contract, not stock. Private-company options are hard to turn into cash without a tender, secondary or exit — so the cash you send in may sit in illiquid shares for years.

The big idea

Early exercise (if the plan allows): buy unvested shares now, typically file an 83(b), and let vesting become a repurchase right. Useful when strike ≈ FMV (cheap) and you believe in QSBS / long-term holding — with real cash and forfeiture risk.

Post-termination exercise (PTE) window: classic plans give 90 days after you leave to exercise vested options or lose them. That forces a cash-and-tax decision while you may be unemployed. Some startups extended windows (for example 1–10 years) after talent-market pressure in the late 2010s; many still use 90 days. Read the grant agreement.

Walking through cost

50,000 options at $1.50 strike:

Exercise cost = 50,000 × $1.50 = $75,000

That $75,000 buys shares. It does not pay tax. NSOs add ordinary income on the spread at exercise; ISOs can add AMT on the same spread with no cash from a sale.

Until liquidity exists, the honest framing is: illiquid, high-variance deferred compensation with real exercise and tax frictions. That can still be a great bet. It is a bad mortgage down-payment plan.

Private-market secondaries and tender offers occasionally let employees sell a slice of vested shares. Rules vary: company ROFR, board approval, investor allocation, holding periods, and tax withholding. Do not spend unrealized gains. A tender at a $30 post-money mark does not mean your options are worth that times fully diluted shares without preference math.

Common mistakes

• Missing the 90-day window after a layoff. Vested options can expire while you are job-hunting.
• Early-exercising a large spread. You pay tax (or AMT) on value you may forfeit if you leave.
• Spending paper gains. A tender price is not a paycheck until shares are sold and taxes are paid.

Check yourself

You leave with 20,000 vested options at a $2 strike. The plan's PTE window is 90 days. What happens on day 91 if you have not exercised?

Those options typically expire. The window is a hard deadline in most classic plans.

When is early exercise most attractive?

When strike is about equal to FMV, the cash outlay is small, and you can afford to lose it if you leave or the company fails.

Key takeaways

• Exercise = pay shares × strike to receive shares.
• Early exercise plus 83(b) can start tax clocks when the spread is tiny; it risks cash if you forfeit.
• Classic PTE windows are 90 days. Read yours.
• Do not spend unrealized private-company gains.

Further learning

Tax detail: equity taxes. Next, turning a grant into a model: evaluating an equity offer.