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You may hear people refer to this price as the grant price, strike price or exercise price. No matter how well or poorly the company does, this price will not change. You can also hold it and hope that the stock price will go up more. Note that you will also have to pay any commissions, fees and taxes that come with exercising and selling your options.

There are also some ways to exercise without having to put up the cash to buy all of your options. For example, you can make an exercise-and-sell transaction. To do this, you will purchase your options and immediately sell them. Rather than having to use your own money to exercise, the brokerage handling the sale will effectively front you the money, using the money made from the sale in order to cover what it costs you to buy the shares.

Another way to exercise is through the exercise-and-sell-to-cover transaction. With this strategy, you sell just enough shares to cover your purchase of the shares, and hold the rest. You can find this in your contract. When and how you should exercise your stock options will depend on a number of factors.

You would be better off buying on the market. But if the price is on the rise, you may want to wait on exercising your options. Once you exercise them, your money is sunk in those shares. So why not wait until the market price is where you would sell? That said, if all indicators point to a climbing stock price and you can afford to hold your shares for at least a year, you may want to exercise your options now.

Also, if your time period to exercise is about to expire, you may want to exercise your options to lock in your discounted price. You will usually need to pay taxes when you exercise or sell stock options. What you pay will depend on what kind of options you have and how long you wait between exercising and selling. With NQSOs, the federal government taxes them as regular income. The company granting you the stock will report your income on your W The amount of income reported will depend on the bargain element also called the compensation element.

What are Employee Stock Options?

When you decide to sell your shares, you will have to pay taxes based on how long you held them. If you exercise options and then sell the shares within one year of the exercise date, you will report the transaction as a short-term capital gain. This type of capital gain is subject to the regular federal income tax rates. If you sell your shares after one year of exercise, the sale falls under the category of long-term capital gains.

The taxes on long-term capital gains are lower than the regular rates, which means you could save money on taxes by holding your shares for at least one year. ISOs operate a bit differently.

You do not pay taxes when you exercise ISOs, though the amount of the bargain element may trigger the alternative minimum tax AMT , which phases out income exemptions targeted for low- and middle-income taxpayers. When you sell shares from ISO options, you will need to pay taxes on that sale.

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If you sell the shares as soon as you exercise them, the bargain element is treated as regular income. 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. Think about things like: Would it have employees, or nearer ? How many countries would it be in? How popular might the product be? Your company ended up winning the battle. It became a revenue-making thing.

Your reputation grew, which made hiring easier. Or a big investment round helped you expand internationally.

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These dream scenarios will differ from company to company, but think about what it would look like for yours. This one is slightly pessimistic — not full-on bankruptcy, but not nice either. Think of the key hurdles still ahead for your company. Not sure how to make your product profitable yet?

Will you need to raise more money soon? Is your ambition to expand internationally? Estimate once more. Using your 3 numbers, you can move from company exit values to estimating your personal payout in each scenario. Figure out what your stake in the company is, multiply it by the exit values, and there you have it. You'll never reach accuracy, but having some perspective is better than none.

Also your perspective develops over time.

Keep reading about other startups, especially those similar to your company, to get more familiar with how exits work. Use your scenarios and exit values as starting points for discussions with colleagues and leadership. Do they share your thoughts, or have different expectations for the future of your company? This helps you sharpen your view. As the history of your company reveals itself month by month, or if there are any major ups and downs, make a mental update of your future scenarios.

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Lastly, note that your forecasts don't factor in dilution. As you discuss future scenarios with your leadership, ask them about their expectations of dilution. They won't be able to tell you for sure. But based on the amount of capital they're planning to raise, they should be able to give you a rough idea.

You can buy some, or all, of your shares today, instead of waiting for the exit. As someone with equity, it's the one big decision you need to make. The tricky part? You pay money before getting any payout. That's money you risk losing : your company might not have a successful exit, in which case you never actually get that payout. But on the flip side: the more options you exercise pre-exit, the higher the upfront costs. It's a classic risk-reward trade-off. Step 2 is a personal one — in the end, no one can make that call for you. Normally, your payout minus the strike price is taxed as ordinary income.

If you exercise pre-exit, a part of it may be taxed as capital gains — a lower tax rate — instead. The important question is: how much of a difference does it make, and how high is the upfront cost? If the difference is small, it might not be worth the risk. The answer depends on your tax situation, income, and type of stock options. We offer a free tool called Pre-Exit Exercise , which helps you crunch the numbers.

Based on your details, it forecasts the difference in profit between exercising now or waiting for the exit. If the upfront costs are affordable, consider exercising all your options pre-exit. It gets tricky when the differences in profit are substantial, but the upfront costs are too. This choice is a personal one.