Should I Exercise My Stock Options as Soon as They Vest?

The Dilemma Every Tech Executive Faces

 

If you’ve ever stared at your vesting schedule and wondered “Should I exercise my options now or wait?” – you’re not alone. Among tech employees, this exact question pops up almost daily. Some people fear a huge tax hit, others worry about missing a liquidity event, and many just want to avoid making a costly mistake.

 

The truth? The right answer depends on your goals, tax situation, and risk tolerance. Let’s break it down in plain English.

 

What “Exercising Your Options” Really Means

 

When your company stock options vest, you gain the right to buy shares at a set price – your strike price.

• Incentive Stock Options (ISOs) often get better tax treatment.
• Non-Qualified Stock Options (NSOs) are simpler but trigger immediate income tax when exercised.

If your company’s fair market value (FMV) is higher than your strike price, you already have “paper gains.” The key question becomes whether to lock in those gains now or wait.

 

Why Exercising Right Away Can Be Smart

 

There are a few reasons some executives exercise early:

 

1. Long-term capital gains clock starts sooner.
The earlier you exercise, the sooner your holding period begins. Hold ISOs for more than 1 year post-exercise (and 2 years post-grant), and profits may qualify for lower long-term capital gains rates.

 

2. Lower exercise cost if your company is early-stage.
If the company’s valuation is still modest, exercising early could mean less out-of-pocket cost and a smaller AMT impact.

 

3. You’re confident in the company’s future.
If you believe your company will go public or get acquired, locking in shares now might position you for a meaningful upside later.

 

Why Waiting Might Be the Wiser Move

 

But exercising as soon as you vest isn’t always ideal. Consider these drawbacks:

 

1. The AMT trap.
Many people learn this the hard way: exercising ISOs can trigger Alternative Minimum Tax based on the spread between your strike price and FMV – even if you haven’t sold. That’s a tax bill on unrealized gains.

 

2. Tied-up cash.
You’re spending money to buy shares you can’t sell yet. If the company’s stock falls or stays private longer than expected, you’re stuck holding an illiquid position.

 

3. Job mobility risk.
If you exercise and then leave your employer, you’re holding a concentrated, non-diversified bet on one company’s future.

 

The 90-Day Rule – A Major Decision Point

 

If you leave your company, you typically have 90 days to exercise vested options. This is one of the most common panic moments for option-holders:

• “I left my startup and have 90 days to come up with $120k to exercise. What do I do?”

In many cases, this deadline forces an emotional and financial decision. You can:

• Exercise immediately and take ownership of the shares (tax risk included).
• Let them expire, forfeiting potential upside.
• Negotiate an extension if your employer allows it (some modern startups now offer this).

This is often the moment when a financial planner can make the biggest difference – modeling your potential outcomes and minimizing unnecessary taxes.

 

The Smart Way to Decide – Use a Framework

 

Every decision to exercise should consider three lenses:

 

1. Tax Impact
Estimate how much AMT or income tax exposure you’d face. If the tax bill exceeds your comfort level, consider spreading exercises across tax years or coordinating with a CPA.

 

2. Cash Flow Flexibility
Can you afford to pay for the exercise and the potential tax bill without compromising liquidity for your lifestyle or goals?

 

3. Concentration Risk
How much of your net worth is tied to your employer’s stock? Diversification protects you if the company underperforms.

 

This isn’t about chasing the highest upside – it’s about aligning your decision with your broader financial plan.

 

What High-Income Tech Executives Typically Do

 

At BSG Advisers, we’ve seen three common paths among executives:

• The Early Optimizer: Exercises small tranches annually to balance AMT exposure and start the capital gains clock.
• The Wait-and-See Strategist: Defers exercise until a liquidity event is on the horizon, minimizing cash tied up in illiquid stock.
• The Diversifier: Exercises and sells immediately after vesting (when allowed), preferring to redeploy gains into a diversified portfolio.

Each approach can be right – but only when grounded in a personalized financial and tax strategy. If you don't have a personalized financial plan and are interested in learning more, click here.

 

What About RSUs and ESPPs?

 

While RSUs automatically convert to shares upon vesting, Employee Stock Purchase Plans (ESPPs) offer discounted shares that can create similar concentration and tax questions. Many tech professionals blend multiple types of equity, making tax optimization even more complex.

Coordinating these pieces with a professional can significantly improve after-tax outcomes.

 

FAQs

 

Q: What happens if I exercise and the company goes under?
A: You could lose your entire investment – another reason not to overconcentrate.

 

Q: Can I sell shares immediately after exercising?
A: Only if they’re liquid (publicly traded). Private companies often restrict this until an IPO or secondary market event.

 

Q: How can I estimate AMT before exercising?
A: Work with a tax advisor to model your AMT exposure using current year income, strike price, and FMV.

 

Q: Is it better to exercise ISOs or NSOs first?
A: Typically ISOs offer better long-term tax treatment, but NSOs are simpler. A planner can prioritize based on your bracket and exit timing.

 

The Bottom Line

 

The decision to exercise options as they vest isn’t just about taxes or timing; it’s about aligning your equity strategy with your life plan .

 

Done right, it can reduce long-term taxes, improve diversification , and set up your family for financial independence. Done wrong, it can mean unnecessary tax bills or illiquid wealth.

 

The Next Step

 

If you’re a tech executive with stock options or RSUs and want to know the smartest timing for your situation, let’s talk.

Schedule a Consultation with BSG Advisers – we’ll model your equity decisions, minimize taxes, and align everything with your long-term plan.