Secfi’s Exercise Pre-Exit calculator

Should you wait until your company IPOs to exercise your options, or should you exercise beforehand to increase your after-tax profit?

The tax savings could be huge.

Use our calculator to see the difference given your personal equity and tax situation:

▶️ Calculate your potential tax savings


Here's what the calculator looks like:

Why should I exercise my stock options?

When you exercise options, you buy company shares. If you hold them for a year before selling them, the money you make is taxed at the long-term capital gains rates. Otherwise it's taxed at ordinary income rates, which is a higher tax rate.

That means that if you exercise early enough, you'll get a tax discount, and maximize your net profit in case a successful IPO or acquisition happens.

The difference between these two tax rates adds up quickly. The gain can be as high as 30%.

Consider for example Freya, a Pinterest tech lead:


We’ve written a bunch articles about the potential benefits of exercising prior to an IPO, with plenty of real world examples of employees of Pinterest, Snowflake and DoorDash paying far more in taxes than they could have.

But the exact gain you'll get depends on your specific equity and tax situation, as well as how successful of an exit your company will have.

That's why we built the Pre-Exit Exercise calculator, which takes these things into account and lets you model out various scenarios.

How to use the Pre-Exit Exercise calculator

As explained, exercising pre-exit may reduce the total taxes you would need to pay. We built the Pre-Exit Calculator to help you calculate how much of a difference it makes, and how high the upfront cost of exercising is. If the difference is small, exercising might not be worth the risk.

You’ll need to enter the future exit value of your company – which, as we know, is uncertain. So it's good to consider multiple scenarios. Here’s what to do:

  1. Create a Secfi account and enter your equity details and tax situation
  2. Go to Pre-Exit Exercise.
  3. Enter an exit value you believe is slightly optimistic but achievable based on the company’s current value today: your base scenario. See how exercising pre-exit affects your profit in this scenario.
  4. Now enter an exit value you believe is achievable if everything went better than expected: your dream scenario. Consider the difference again.
  5. Lastly, enter an exit value that you think could happen in disappointing scenario.
  6. Reflect on the necessary investment to receive this potential extra profit. Is it worth it to you? Are you ready to exercise?

What if I can’t afford to exercise my options?

Especially if you’re an early employee, the exercise tax bill can be hefty. 

If this puts exercising out of your financial reach, there are two things you can do:

  1. Exercise only a part of your options
    You can exercise options up to the amount you’re comfortable with paying for. This way, you still partially benefit from long-term capital gains. To compute the number of options you can exercise within a given budget, use our Budget-Based Exercise calculator (log in to access it).
  2. Have Secfi fund your option exercise.
    We provide financing to cover your exercise costs. It’s non-recourse, which means you only have to pay us back if your equity allows you to. If your company successfully IPOs, we share in the upside. If for some reason it doesn’t, you don't take the loss. Your personal money is not at risk.

Another solution is to do a mix of the two: exercise as many stock options as your personal budget allows, then have Secfi fund the remainder.

How does the Exercise Pre-Exit calculator calculate my tax reduction?

Great question! First we calculate what it would cost you if you were to hold on to your options until the IPO, and sell all your options straight away at an exit price of your choosing, the proceeds of which would be taxed at ordinary income rates.

Then we calculate what it would cost you if you were to exercise today, and sum this with our calculation of your long term capital gains taxes if you sell the shares a year later. Subtracting the exercise scenario from the wait till IPO scenario then gives you the potential savings if you were to exercise today.

What is early exercising?

Early exercising is when you exercise your stock options before they vest. 

This may increase your profit by minimizing your overall taxes, as well as decrease the upfront costs when you exercise.

Early exercising is something not normally possible: companies have to specifically allow it. Ask your employer or check your option grant if you’re not sure whether this is the case for you.

Learn more about early exercising here.

Coming soon

Still working on this one.

Want us to mail you when it's live? Drop your email address below and we'll notify you when we publish this and other articles.

Hope that was helpful
Ready for personalized equity insights?
Create your free account.
Enjoying
this guide?

Enter your email and we’ll let you know when we add the next Equity Academy guide.