Vieje Piauwasdy
Director, Equity Strategist

Editor’s note: A version of this question originally appeared on Reddit.

A couple weeks after I quit my job, I learned that my old startup was being acquired. I have some vested stock options and I have a couple months to exercise them. It seems like the acquisition is going to happen, but you never know — especially now that I’m on the outside.

Should I exercise my stock options now, or wait until the sale gets finalized?

All my old coworkers are being told the acquiring company will pay them cash for their vested stock options once the deal gets finalized, and it’s unclear if the same deal is being extended to former employees like me. What should I do?

- Anonymous

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Dear Anonymous,

I can totally empathize with your situation. A lot of startup employees ask themselves whether it makes sense to exercise their stock options when they leave their company. In your case, you have just a few months to make the decision, with the added complexity of this potential acquisition.

There are a couple things to figure out immediately:

  1. What is your deadline to exercise your stock options?
  2. Now that a possible acquisition is in the works, is there a stock options exercise blackout period?
  3. How much will it cost to exercise your stock options, both in exercise costs and taxes?
  4. What are the terms of the acquisition? Cash? Stock swap? A mixture of cash and stock?

Points #1 and #2 are related. From your note, it sounds like you have a couple months to make your decision about whether to exercise. This sounds like the standard 90-day stock option exercise window that most startup employees face when they leave a company.

However, you may find that the company enacts a stock options exercise blackout period close to the acquisition, where people are not allowed to buy or sell stock options. That could potentially affect the timing of your exercise, so I’d recommend reviewing your stock option paperwork with a CPA or licensed financial advisor.

Points #3 and #4 really get at the larger question of acceptable risk and return. Your stock options administration platform — for example, Carta — will tell you your stock option strike price, and the fair market value of your stock, in the form of the latest 409A valuation.

Using that data, you can map out the cost of exercising your stock options. For example, let’s say you’ve vested 5,000 shares of incentive stock options (ISOs) at a strike price of $1 per share, and a 409A valuation of $5 per share:

Under this example, if you decided to exercise your shares, you’d report to the IRS a gain (on paper) of $20,000, which may potentially trigger the alternative minimum tax, or AMT. 

Note: You’ll be taxed differently if you hold a different type of stock options, like non-qualified stock options (NSOs) or restricted stock units (RSUs).

Once you know the cost to exercise, you’ll need to make a decision about whether the risk of exercising makes sense in light of your personal finances. 

It sounds like this potential acquisition is still being negotiated, so it’s impossible to know what the final terms of the deal will be, or even if the deal will go through at all. It might be an all-cash acquisition, a stock swap, a mixture of cash and stock, or some other combination.

These are good questions to explore with your CPA or licensed financial advisor. You might also try reaching out to your former employer for more details. But don’t wait too long — you’re facing a limited amount of time to make the decision.

- Vieje Piauwasdy, Director of Equity Strategy, Secfi

Do you have a question about your stock options? Email us at ask@secfi.com

Vieje Piauwasdy
Director, Equity Strategist
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