You’re about to leave your startup job after pouring your heart, soul and considerable skills into it.
Between the exit interview, the handover and your future plans – you’re reminded you only have a short window of time (usually 90 days) to exercise your employee stock options.
Yeah, those employee stock options you discussed before joining the startup – the ones that may potentially change your financial future one day when the company gets acquired or goes public.
Yet, before that happy day comes, there are things to consider before exercising your employee stock option.
Not only do you need to consider coming up with the funding to exercise, but also the money to cover the hefty cost of taxes that’ll later come (up to 22X your exercise cost, based on EquityBee data).
Nevertheless, you have your employee stock option and you’re ready to exercise.
But how do I even get the money to exercise my employee stock option and cover the taxes…? You ask.
No worries, we got you covered! In today’s article, we detail the 3 ways you can go about exercising your vested employee stock options.
1st Method: Exercise Your Employee Stock Option Alone
This first method is exercising your employee stock option alone. This method has the highest payout, but also the highest risk factor.
Exercising alone would require you to come up with the cash on your own, for both the stock and the taxes.
Rewards of Exercising on Your Own
Exercising your options on your own is a great way to do it if you have the available funds and a strong conviction of the company reaching a meaningful liquidity event.
You’ll immediately become the owner of shares at your former workplace, and once the company goes public or gets acquired – you won’t have to share your gains with anyone (other than the tax authorities).
Risks of Exercising on Your Own
When you exercise your options using your own money, you are facing similar risks to those of a startup investor.
Since 90% of startups fail before reaching a liquidity event, this is considered to be a high risk stock investment even more than trading.
Here’s a useful blog post you should read when considering this move.
Another important point to consider is your taxes.
In the US, you’ll be taxed when exercising your employee stock options. While this varies based on state, the taxes you’ll need to pay usually reach 2X of your exercise cost on average and may even reach 22X of your exercise cost, based on EquityBee data. Many people are not necessarily aware of that significant cost while making this decision.
How to Exercise Your Employee Stock Option Alone
If you decide to exercise alone, you can purchase your shares with cash and simply hold onto them, giving you stock in the company. In the event the company IPOs or gets acquired, sell your shares and the money is all yours!
2nd Method: Sell Into a Secondary Market
Another available option when looking to gain from your stock options is selling them into the secondary market.
Unlike the other methods we’re looking at in this article, selling your options means you will not become the owner of shares in the company.
Instead, you transfer your options to someone else in return for monetary gain.
Rewards of Selling Into a Secondary Market
Selling your shares in the secondary market gives you the instant gratification of being paid for your shares.
And depending on your situation, this could be a positive!
If your company doesn’t experience a successful liquidity event or one at all, you still will have received monetary gains from previously selling to a buyer.
Risks of Selling Into a Secondary Market
It’s important to keep in mind that is where the journey ends. If the company later goes public or gets acquired, you won’t be eligible for any potential further gains as you’ll no longer own your shares.
If your company has a successful liquidity event, the buyer of your employee stock option reaps those rewards.
Feel like you can live with that?
Keep in mind you might not be allowed to sell your private stock this way – it’s a good idea to check your options grant and speak with the company’s General Counsel.
Finding a legitimate buyer and managing the process may also pose some challenges.
Moreover, a sale is still a taxable event and sales within 1 year of exercise are subject to a higher income tax rate.
How to Sell Into a Secondary Market
A quick Google search will show you a multitude of companies eager to buy your employee stock option.
And there you have it!
You’re set, you can begin the process of selling your employee stock option.
3rd Method: Get Funding to Exercise Your Options
The last method on our list may be less well-known, but let’s you reap the benefits of becoming a shareholder without spending money out of your own pocket to exercise your options without having confidence in the outcome.
Many investors will be happy to provide you with non-recourse financing, or in other words:
Give you the funding to exercise your options, so you may share your profits with them in case your former workplace reaches a liquidity event.
Rewards of Getting Funding to Exercise Your Options
In many ways, this method combines the rewards of exercising on your own with those of selling your shares.
You avoid the difficult financial decision of whether you should give up on your hopes for a positive outcome following a potential liquidity event – or depart from a meaningful sum of money.
The investor providing the funding is shouldering the cost for you at this point, and you get to achieve ownership of your shares and only pay the investor back (and share your profits with them) in case of a successful liquidity event.
Risks of Getting Funding to Exercise Your Options
There are quite a few options out there if you’re looking to get funding to exercise your options.
However, many of those offering this service are either private investors or platforms looking to attract investors first and foremost.
This means you’ll need to pay close attention to the terms of the deals offered to you, and make sure that in case of a liquidity event – you still stand to gain, after returning the initial funding to the investors, deducting taxes, splitting the proceeds and paying all the fees.
This is why choosing the right non-recourse financing company is absolutely essential.
Exercising Your Options With Funding From Equitybee’s Investor Community
At EquityBee, we give you the ability to exercise your stock options in a way that is both seamless and anonymous.
We also cover the funding for both your employee stock options and your taxes.
As startup builders, we know that employee stock options can change the financial future of startup employees.
We believe every startup builder should have the right to own their hard-earned stock options.
This is exactly why we designed our platform, process, and funding at EquityBee to benefit you, the employees!
This is something we live by every step of the way – from providing hands-on support (including actually wiring the exercise amount to your former workplace!) to making sure the split of profits is favorable to you and of course to making sure you feel comfortable with all the legal terminology in case the company gets acquired or goes public.
You can get a more in-depth look at the entire process of getting funding and exercising your options with EquityBee in this blog post.
So, still debating what’s the best fit for you?
Feel free to sign up to EquityBee and one of our Equity Success Managers will be happy to answer all your questions!