Unlocking the Value of Your Stock Options

Why Companies Offer Stock Options

Employers use stock options to attract and retain talent. Instead of (or in addition to) a higher salary, they give you the opportunity to benefit from the company’s long-term success. It’s a way to align your financial future with the business’s future. If the company grows, your options could grow in value, too. But there’s a catch: you usually have to wait before you can use them, and they’re not guaranteed income. That’s why understanding how they work is so important.

What It Means to Be “Granted” Options

When a company "grants" you stock options, it’s offering you the right to buy company shares at a set price—usually below market value—at some point in the future. That “set price” is called the grant price or strike price, and it's locked in when the options are issued.

If the company performs well and the stock price increases, you may be able to buy shares at your original grant price and sell them at the higher market price for a profit. But if the company’s stock drops below your grant price, your options may become worthless—at least temporarily.

Vesting Schedule: When You Can Use Your Options

You don’t get access to all your stock options right away. Most companies use a vesting schedule to determine when your options become available to use. It’s common for employees to earn access to a percentage of their options each year, or to have an initial cliff—for example, nothing vests for the first year, then 25% vests at once. Once options vest, you can exercise them—that is, purchase the shares at your grant price.

Stock options don’t last forever. If you want to use them, you need to act before they expire—typically within 10 years of the grant date. If you leave the company, you may have only a short window (often 90 days) to exercise your vested options before you lose them. Timing matters. It’s essential to understand your company’s specific rules and deadlines.

Risk & Diversification

You can’t count on any guaranteed outcome so be thoughtful about diversification. You may want to keep in mind the old saying about not counting your chickens before they hatch. Owning too much of one company’s stock puts you in a vulnerable position, especially if that company is your employer. If the stock price drops because the  company is struggling, employees could lose their jobs and the value of their stock options around the same time.

When Are Stock Options Taxed?

You're not taxed when you're granted stock options. Taxes come into play at two possible points: when you exercise your options (buy shares at the grant price), or when you sell the shares you’ve purchased. The type of option you hold—Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs)—determines exactly how these two events are taxed.

NSOs: Income Tax Upfront

With Non-Qualified Stock Options, you owe ordinary income tax on the spread (difference between the grant price and market price) at the time you exercise. Your employer reports this as income on your W-2, and taxes are usually withheld. If you later sell the stock at a higher price, you’ll owe capital gains tax on the additional gain. This means exercising NSOs can create an immediate tax bill—even if you don't sell the shares.

ISOs: Potential for Preferential Tax Treatment (and AMT Risk)

Incentive Stock Options can qualify for long-term capital gains tax treatment if you meet two conditions; holding the shares for at least one year after exercising, and waiting at least two years after the grant date before selling.

But there’s a catch: the spread at exercise is counted toward Alternative Minimum Tax (AMT). So even if you don’t owe ordinary income tax, you could trigger an AMT liability. AMT is complex and doesn’t apply to everyone—but if you're a high earner or exercising a large number of options, it’s essential to work with a CPA to understand your risk.

Timing Your Moves

Stock options often give you some flexibility on when to exercise, which gives you room to plan for tax efficiency. For example:

• exercising in a lower-income year may reduce your tax burden
• spreading out exercises over multiple years may avoid pushing you into a higher tax bracket
• selling quickly after exercising (a “cashless” strategy) limits tax exposure but also forfeits long-term capital gains potential.

Tax planning around stock options is often a balancing act between risk, reward, and timing.

Real Life Impacts

People have come to us after having exercised large amounts of stock options without realizing it would significantly increase their taxable income—or worse, trigger AMT without enough cash on hand to cover it. That’s why we recommend modeling the tax impact before exercising, especially if you plan to hold the shares.

Don't Rely on Options Alone

While stock options can feel like a golden ticket, they’re tied to one company—often your employer. That means your income, your benefits, and your potential upside are all connected to a single source.

Holding too much company stock can create concentration risk, especially if it’s an early-stage or volatile business. That’s why financial professionals often advise diversifying, even if it means giving up some long-term gain for more stability.

Know Your Risk Tolerance

Stock options aren’t guaranteed income—they’re a bet on your company’s future performance. That makes them riskier than other parts of your financial plan. Some people are excited to hold shares long-term, confident in their company’s growth. Others would rather take some value off the table sooner and reduce uncertainty.

There’s no one right answer—but your choice should reflect your comfort with market swings, cash flow needs, and how much of your overall net worth is tied up in one company. A good financial plan doesn’t ignore risk—it builds around it.

Align With Your Life Goals

Stock options are a tool—not a plan. We help clients think through how to make the most of their options within the context of real priorities such as paying off debt, saving for a home, funding education, or planning for retirement. Your decision to exercise or sell should serve your goals, not distract from them.

Understand What Just Became Available

Your grant agreement should outline your vesting schedule—the timeline over which your options become exercisable. Many companies use a structure like:

• 25% of your options vest after your first year (a “cliff”)

• The remaining 75% vest monthly or annually over the next few years

Once vested, those options are yours to exercise—subject to company rules and expiration windows.

Don't Let Expiration Sneak Up on You

Even though vesting gives you flexibility, your options won’t be around forever. Most expire 10 years after the grant date, and if you leave the company, you might only have 90 days to act.

This is where many employees get caught off guard. Missing a deadline can mean forfeiting options that once held real value.

Exercising Isn't All or Nothing

You don’t have to exercise all your vested options at once. Some people choose to exercise a portion, hold some for later, or explore strategies like:

• Cashless exercise: Using shares to cover the cost and taxes

• Sell to cover: Selling just enough shares to cover exercise costs

• Exercise and hold: Exercising and holding long-term (with potential tax advantages)

The right choice depends on your financial goals, risk tolerance, and tax situation.

Example: How Stock Options Work

Let’s say that your employer offers you the option to buy 5,000 shares at an exercise price of $10 per share with a five-year vesting period. When your stock options fully vest after five years, the market price of the shares is now $25. Your stock options locked you into that $10 price, so you can buy 5,000 shares for $50,000. Now you can turn around and sell your shares for $125,000 (5,000 x $25). Or, if you think the stock price will continue to rise, you can hold onto your shares.

Sometimes, the market value of the company’s stock is lower than the exercise price. Using the above example, let’s say your options fully vest after five years and the market value is $5 a share. Unfortunately, your stock options are worthless. You only make money when the company does well. (This is one of the primary disadvantages of employee stock options. If the company’s stock price drops because the company isn’t doing well, you can’t make any money with your options and your job and income might be in danger. It’s risky to put too much weight on stock options as part of your portfolio.)

There are two types of stock options: non-qualified stock options (NSOs) and incentive stock options (ISOs). They’re taxed differently, so it  matters which kind you’ve been granted. If you exercise non-qualified stock options, and pay less for the shares than they’re currently worth, the difference between those prices will be taxed like normal income. In the above example, when you pay $50,000 for shares that have a market value of $125,000, the difference of $75,000 is taxed as ordinary income—but only with non-qualified stock options. ISOs don’t have this tax obligation.