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Should I exercise my stock options before my company goes public?
Only with money you could lose completely. Exercising before an IPO can lower the tax and start the long term holding clock early, but you pay the strike price and often a tax bill in cash, for shares you usually cannot sell. If the company never goes public or sells for less, that money is gone. Waiting costs more tax but risks nothing up front.
Exercising early trades a smaller tax bill for cash you cannot get back.
A stock option is the right to buy company shares at a fixed price, the strike. Exercising means paying that strike to actually own the shares. At a private company there is usually nowhere to sell them afterward. There is no market and no ready buyer, and the company often has the right to block or match any sale you try to make.
So the bigger decision is whether you want to move cash out of your bank account and into one private company, with no way out until that company goes public or gets bought. The tax savings are real. They only matter if the company gets there.
A quick note on who is talking. opfinances.com is a licensed insurance agency. We are not a financial advisor, not a fiduciary, and not a tax adviser. This is general education, not advice about your situation.
The tax at exercise is based on today's value, and today's value is usually lower.
When you exercise, the gap between your strike and the share value that day is the spread. At a private company that value comes from a 409A valuation, an appraisal the company orders, and it often runs well below what a later IPO price turns out to be.
How the spread gets taxed depends on the option type. Nonqualified options, NSOs, treat the spread as wages at exercise, and the company withholds on it, which at a private company can mean writing a check for the withholding too. Incentive stock options, ISOs, skip the regular tax at exercise but add the spread to the alternative minimum tax calculation, which can produce a bill the next April on shares you still cannot sell.
Either way, a small spread means a small tax. Exercise when the 409A value is close to your strike and the tax can be close to zero. Wait until after an IPO and the same options can carry a spread many times larger, all of it taxed.
Exercising early also starts the clock on the lower capital gains rate.
Once you own the shares, growth from the exercise value up to the eventual sale price is a capital gain. Hold more than a year from exercise and it is a long term gain on your federal return, taxed at lower rates than wages. ISOs need two years from grant and one year from exercise for the full benefit.
If you wait until after the IPO, the clock has not started. Many people exercise and sell on the same day once the stock trades, which takes no cash up front but taxes the whole spread at ordinary rates. California taxes capital gains as ordinary income no matter how long you held, up to 13.3%, so the holding period only helps on the federal side.
The money is at risk the moment you exercise.
Illustrative arithmetic, not a tax estimate. An engineer has 20,000 vested options with a 1.50 dollar strike and a 409A value of 6 dollars. Exercising costs 30,000 dollars. The spread is 90,000 dollars, which as NSOs is taxed as wages now, or as ISOs goes into the AMT math. Call it 30,000 dollars plus a tax bill in the tens of thousands, all in cash.
If the company goes public at 20 dollars, that was a good trade. If it gets acquired for less than the preferred investors put in, common shareholders can get very little. If it shuts down, the shares are worth nothing, and the tax already paid does not come back. A capital loss offsets only 3,000 dollars a year of ordinary income after it wipes out any capital gains, so a large loss can take years to use.
Most venture backed companies never go public. And after an IPO there is usually a lockup, often around six months, before employees can sell. The price can fall a long way in that window.
Leaving your job can force the decision for you.
Many plans give you about 90 days after you leave to exercise vested options or lose them. ISOs also lose their ISO status if you exercise more than three months after leaving, even when the plan gives you longer, and become NSOs taxed as wages.
That is the situation where people make this call worst: a new job, a short deadline, and a pile of options at a company that may be years from an exit. Find out your plan's post termination window before you resign, not after.
Size the bet so losing it would hurt but not change your life.
A common middle path is exercising part of what has vested, small enough that losing all of it would sting but not change your plans. Your salary already depends on this company. Putting your savings there too doubles the exposure.
If the company does go public and the position grows large, there are structures that can change how a big sale is taxed. We are not going to list them, because which ones fit depends on facts only you have, and they are worth a real conversation before the sale rather than after.
About incentives. We get paid when a client ends up in a product we offer. Nobody gets paid when the answer is that you exercised a small slice and kept the rest of your savings where they were. Weigh anything anyone tells you about your options with that in mind, us included.
Before you decide
Questions worth asking.
Are my options ISOs or NSOs, and what is the current 409A value compared with my strike?
If I exercise now, how much cash goes out for the strike and how much for tax, federal and California?
If this company shuts down or sells below what the investors put in, what do my common shares get?
How many days do I have to exercise if I leave, and does the company let me sell shares before an IPO?
What would I give up in tax by waiting until after an IPO, and how does that compare with the cash I could lose by exercising now?
If you are recommending I exercise, hold, or move the proceeds into something, what do you earn on each choice?
Related
What is a 409A valuation?
It is an independent appraisal a private company gets for the fair market value of its common stock. It sets the strike price for new options and the value used to figure the spread when you exercise.
What is early exercise and an 83(b) election?
Some companies let you exercise options before they vest. If you do, filing an 83(b) election with the IRS within 30 days fixes the taxable spread at that day, often zero, and starts the holding clock. Miss the 30 days and you cannot fix it later.
Can I sell private company shares before an IPO?
Sometimes, through a company tender offer or an approved secondary sale. Most private companies restrict transfers and keep a right of first refusal, so you need the company's permission and a buyer.
Does qualified small business stock change the answer?
It can at the federal level. Stock in a qualifying company held long enough can have some or all of its gain excluded, and the holding period starts at exercise. The rules changed in 2025 and California does not follow them, so check the details with a tax professional.
What happens to unvested options if the company is acquired?
It depends on the plan and the deal. Options can be converted into the buyer's options, cashed out, sped up, or cancelled. Read the acceleration terms in your grant before assuming anything.
Where this fits.
This question sits inside a bigger one. Tax Deferred Strategies walks through the whole decision rather than this one piece of it.
On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.