- Exercising stock options: How and when to exercise your options
- What does it mean to exercise stock options?
- Vesting and your exercise window
- In the money vs. underwater
- How to exercise stock options
- How much does it cost to exercise?
- When to exercise stock options
- Exercising stock options after vesting
- Exercising stock options when you leave the company
- Exercising stock options early
- Tax implications of exercising stock options
- Tax forms you'll receive after exercising
- Should I exercise my stock options?
- When should I sell my shares?
- How Carta helps you make equity decisions
- Frequently asked questions about exercising stock options
What does it mean to exercise stock options?
Exercising stock options means using your right to buy company shares at a set price, called the strike price or grant price. When you exercise, you convert your stock options into actual shares of the company that you own.
Before you exercise, you hold an option, which is the right to buy shares under certain terms. After you exercise, you own real equity in the company. Shareholders have different rights and tax treatment than option holders, which is why that distinction matters.
Your strike price is set when you receive your grant. The company determines this price based on a 409A valuation, an independent appraisal of the company's fair market value (FMV). The difference between your strike price and the current FMV is called the spread, and it affects both your potential gain and your tax bill if you exercise.
When you exercise, you're hoping the shares will gain value so you can sell them for more than you paid. The risk is they end up being worth less than you paid, or nothing at all.
Vesting and your exercise window
You usually cannot exercise your options the moment you receive them. Most grants include a vesting schedule that determines when your options become exercisable. Many plans include a cliff, an initial period during which no options vest. After the cliff, options typically vest in regular increments over several years.
Typically only vested options can be exercised. Unvested options remain a potential future benefit, but you have no right to buy those shares yet.
Your exercise window determines how long you have to act on your vested options. Options expire. Miss the deadline and you lose the right to buy the shares.
In the money vs. underwater
Exercising makes the most sense when your options are in the money: The current FMV is higher than your strike price, so the shares you'd buy are worth more than you pay.
When the FMV is lower than your strike price, your options are underwater. Exercising underwater options means paying more than the shares are currently worth. Most people wait until their options are in the money before exercising.
How to exercise stock options
This video explains how to exercise stock options as part of Carta’s free Equity 101 curriculum.
You have several ways to exercise your stock options. The method you choose depends on your company’s policies, cash on hand, whether you can sell shares, and your financial goals.
Pay cash (exercise and hold): You use your own money to buy your shares and keep all of them. This is the riskiest method because you're not guaranteed to make a profit or even get your money back, and your money is tied up until you sell. However, it could pay off if your shares appreciate and you could be in a more favorable tax position at sale.
Cashless (exercise and sell to cover): If your company is public or running a tender offer, you may be able to exercise and sell enough shares in a single transaction to cover the purchase price, fees, and taxes. You then keep the remaining shares.
Cashless (exercise and sell): If your company is public or offering a tender offer, you may be able to exercise and sell all your options at once. The sale proceeds cover the purchase price, fees, and taxes, and you keep the rest.
→ Learn more about cashless exercises
On an equity management platform like Carta, you can see your vested shares, submit an exercise request, and even transfer funds to pay for the shares directly through the platform, all in one place. If your company uses Carta to issue securities, learn how to exercise your stock options here.
How much does it cost to exercise?
Multiply your strike price by the number of options you're exercising to get your total cost. If you hold 1,000 vested options at a $2 strike price, you'd pay $2,000 to exercise them all. If there's a spread between your strike price and the current FMV, that difference may also be taxed.
When to exercise stock options
Exercising stock options can have a very real (and potentially large) impact on your taxes, so consider speaking to a tax advisor before exercising any options.
Exercising stock options after vesting
Many people wait to exercise until a liquidity event is approaching, which avoids tying up cash in shares they can't yet sell.
Waiting can make sense if you want to see how the company performs before committing money. However, waiting too long carries risks—your options have an expiration date, and tax rules may become less favorable if the spread grows.
Exercising stock options when you leave the company
When you leave a job, most companies give you a 90-day post-termination exercise period (PTEP) to purchase your vested shares.
Any unvested options are canceled as of your last day and any vested options must be exercised within that window or they will expire and return to the company's option pool. Some companies offer more generous PTEP periods.
This deadline catches many people off guard. According to Carta's stock options report, 28% of options that don't qualify for early exercise are exercised during the post-termination exercise period. Review your option agreement before you leave so you know exactly how long you have to make a decision.
Exercising stock options early
Some companies allow you to exercise unvested options as soon as you receive your grant. This does not accelerate your vesting schedule, the shares continue to vest on the original schedule.
If you early exercise, you should strongly consider filing an 83(b) election with the IRS within 30 days of the exercise. This election locks in your tax basis at the value on the day you exercised rather than at the time of vest, which can reduce your tax bill significantly. The IRS is very strict about the 30 day filing limit.
Benefits of exercising options early
Favorable tax treatment for incentive stock options (ISO): To qualify, you need to keep your shares for over two years after the option grant date and over one year after exercising.
Starts your holding period sooner: Early exercising starts your holding period sooner for both ISOs (when sold in a qualifying disposition) and non-qualified stock options (NSO). This helps you meet the requirements for lower long-term capital gains tax rates when you eventually sell your shares.
You likely won't owe additional taxes: If you early exercise your options as soon as they're granted (at the time of exercise), you're buying them at FMV. This assumes there's no spread between what the stock is currently worth and how much you paid.
Risks of exercising options early
You have to use your own money: When exercising options early, you can't sell some of your stock to pay for your shares.
There's no guarantee that your shares will increase in value: By waiting for the usual one-year vesting cliff, you may get a better idea of whether you should purchase your options or not.
Keep in mind if your option grant is early exercisable, you may trigger the $100K rule. This prevents you from treating more than $100K of the full value of your grant as ISOs in the year you receive your grant. The value of your option grant above that amount is treated as NSOs for tax purposes.
Also, if you leave your company after early exercising but before your stock vests, your option grant usually gives the company the right to repurchase your early-exercised but unvested stock.
Tax implications of exercising stock options
Whether you hold ISOs or NSOs determines how your stock options are taxed at exercise.
For ISOs, exercising usually does not trigger ordinary income tax. But the spread between your strike price and the current FMV (sometimes called the "bargain element") can be subject to the alternative minimum tax (AMT). A large spread can mean a meaningful AMT bill worth planning for.
For NSOs, the spread at exercise is taxed as ordinary income. You'll owe income tax on the difference between your strike price and the FMV at exercise, regardless of whether you sell the shares.
Both types can trigger additional taxes when you eventually sell and your holding period matters.
Action | ISO tax implication | NSO tax implication |
Your company gives you an option grant | No tax implication | No tax implication |
Your options vest | No tax implication | No tax implication |
You exercise your options | No ordinary income tax when you exercise, but can trigger AMT | Ordinary income tax is likely |
Tax forms you'll receive after exercising
After you exercise, you will receive tax forms documenting the transaction. For ISOs, companies typically issue Form 3921, which the IRS requires for each ISO exercise and which reports the exercise date, strike price, and FMV. Keep this form for your records. You'll need it when you file your taxes and when you eventually sell.
Should I exercise my stock options?
The decision to exercise your stock options comes down to cost, taxes, your read on the company, and whether you could access cash if you needed it.
As Heather Doshay, partner at SignalFire, says: "Exercising options is expensive. If you're a person who's not wealthy, which is most of us, you are going into your savings and having to make a serious decision about where you're investing your extra capital."
In the fourth quarter of 2024, employees at startups on Carta exercised just 32.2% of equity grants that were both fully vested and in the money. For most of the past decade, employees have exercised less than half of all vested shares they hold. Why so low? For many, exercising comes down to weighing affordability against conviction.
Exercising could pay off, but it's not guaranteed. Before deciding, ask yourself:
Can you? Unless your company allows early exercise, only vested options are exercisable. At private companies, you'll also need the cash to buy them outright.
Are your options in the money or underwater? If FMV is below your exercise price, exercising now means paying more than the shares are worth.
How is the company doing? Think honestly about whether the stock's value will rise. Watch out for familiarity bias—it's easy to overestimate a company you work at. Has FMV trended up over time? What do broader market conditions look like?
Can you sell your shares after exercising? At a private company with no imminent tender offer or IPO, you could be holding illiquid shares with no near-term exit.
Can you afford the taxes? Depending on your option type, grant size, and income, you may owe AMT or ordinary income tax at exercise.
When should I sell my shares?
After you exercise your options, it can be hard to know when to sell. A lot of your decision will come down to your specific situation. If you want to maximize your profit, talk to a tax advisor before exercising and selling. While advisors can't predict how your company's stock will do in the future, they could help you figure out your options and suggest ways to minimize your tax liability. Generally your options are:
Exercise and sell right away for a guaranteed profit but probably higher taxes
Hold on to them for at least a year for a potentially bigger profit (or loss) and lower taxes
Exercise and sell within a year (which usually results in the most expensive taxes)
At private companies, remember you can't simply sell shares on the open market. You may need to wait for a liquidity event like a tender offer, secondary sale, or an eventual IPO.
How Carta helps you make equity decisions
Carta's equity management platform lets companies and employees track options, manage exercises, and stay compliant. Carta’s cap table software updates automatically after each exercise, so founders aren't reconciling spreadsheets by hand. For employees, Carta offers equity and tax education to help you understand your grants.
Ready to give your team the tools they need? Request a demo to learn how Carta can help.
Frequently asked questions about exercising stock options
Is it a good idea to exercise stock options?
Whether it makes sense depends on your financial situation and your confidence in the company. If you can afford the exercise cost and any associated taxes, and you believe the company's value will grow, exercising may make sense. Many employees pass on exercising even when their options are in the money.
Do I pay tax when I exercise stock options?
For ISOs, you generally don't owe ordinary income tax at exercise, but the spread may trigger AMT. For NSOs, the spread is taxed as ordinary income.
Can you exercise stock options after leaving the company?
Yes, but typically only for a limited time. Most companies provide a 90-day post-termination exercise period, though some offer longer windows.
What is the difference between vested and exercised options?
Vested options are ones you've earned the right to buy. Exercised options are shares you've actually purchased by paying the strike price.
What happens if you don't exercise your stock options?
Unexercised options typically have an expiration date of 10 years or after your post-termination exercise window closes, at which point they expire.
Is it better to exercise or sell your options?
You generally exercise first to convert your option into shares, then decide whether to hold or sell. Holding may help you qualify for long-term capital gains or qualified small business stock (QSBS) benefits, while selling reduces risk if you need liquidity or are worried about the company's future.
DISCLOSURE: This communication is on behalf of eShares, Inc. dba Carta, Inc. ("Carta"). This communication is for informational purposes only, and contains general information only. Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. © 2026 Carta. All rights reserved. Reproduction prohibited.
