Exercise windows are critical yet often misunderstood aspects of stock option packages. This guide will help you understand the implications of exercise windows and how to navigate them effectively.
An exercise window is the period during which you can purchase (exercise) your vested stock options. This timeframe can vary significantly based on your company's policies and the type of options you hold.
Standard 90-Day Post-Termination Exercise (PTE) Window: The traditional approach most companies use gives departing employees 90 days to exercise their vested options after leaving the company.
Example: Sarah has 50,000 vested options when she resigns. Her company has a standard 90-day window, meaning she must decide whether to exercise these options within 90 days of her last day or lose them forever. With a strike price of $2 and current fair market value (FMV) of $10, she needs $100,000 to exercise all options.
Extended Exercise Windows: Some companies, particularly in tech, have adopted more employee-friendly policies with longer exercise windows. Common variations:
Example: Marcus joins a startup offering a 7-year exercise window. After four years, he's fully vested in 40,000 options but decides to leave. Instead of rushing to make a decision in 90 days, he has 7 years to monitor the company's progress and decide when (or if) to exercise.
Incentive Stock Options (ISOs)
Example: Jessica has 20,000 vested ISOs. Her company offers a 5-year exercise window, but if she waits longer than 90 days to exercise, her options convert to NSOs, potentially increasing her tax burden.
Non-Qualified Stock Options (NSOs)
Financial Planning Considerations
Exercise Costs
Example: David has 10,000 options with a $1 strike price. The current FMV is $5:
Company Stage and Prospects
Personal Risk Tolerance
Early Exercise (If Available): Some companies allow early exercise of unvested options, which can have tax advantages.
Example: Rachel joins a startup and receives 80,000 options with a $0.50 strike price. Her company allows early exercise, so she exercises all options immediately for $40,000, filing an 83(b) election. As the shares vest over four years, she incurs no additional tax liability.
Wait-and-See Approach: With an extended window, you can wait to exercise until:
Partial Exercise Strategy: Exercise options in tranches to balance risk and opportunity.
Example: Michael has 60,000 vested options and a 5-year window. He decides to:
Document Important Dates
Maintain Exercise Resources
Regular Review and Planning
Company Events That May Impact Exercise Windows
Example: Emma's company announces an acquisition. Her exercise window might be accelerated, requiring quick decisions about exercising options before the deal closes.
Leave of Absence Considerations
Cash Exercise
Cashless Exercise (If Available)
Third-Party Financing
ISO Considerations
NSO Tax Planning
Consider consulting:
Tax Advisors
Financial Planners
Legal Counsel
Missing Exercise Deadlines
Underestimating Exercise Costs
Failing to Consider Tax Implications
Remember that exercise windows are a crucial element of your equity compensation that requires careful planning and consideration of your personal financial situation, risk tolerance, and long-term goals.