Should I exercise my vested stock options? For some employees, the math has shifted

Stock options have historically been a key tool used by venture-backed startups to attract and retain talent. 

Over the past few years, however, these startups have encountered a conundrum: Some of those options aren’t as attractive as they used to be. 

In the fourth quarter of 2024, employees at startups on Carta opted to exercise just 32.2% of all equity grants that were both fully vested and in the money (that is, the current value of the options was higher than their strike price). Ever since the end of 2023, the percentage of in-the-money options that employees choose to exercise before they expire has been languishing near historic lows. 

Like so many other recent shifts in the venture landscape, this decline in exercise rates correlates with the recent slowdown in the private markets that began in earnest in 2022. But Heather Doshay, a partner at SignalFire who leads people and recruiting efforts for the venture firm’s portfolio, says that this shift in employee behavior is too complex to pin on a single cause. 

“It’s kind of this perfect storm,” Doshay says. 

How employee stock options work

Stock options are a type of equity compensation that gives employees the option to acquire shares in a company at a predetermined price at a predetermined point in the future. Once stock options are vested, the holder typically must decide whether to make an out-of-pocket payment and exercise their options, or else risk having the options expire and receive nothing in return.

For most of the past decade, employees at startups on Carta have exercised less than half of all vested shares they hold. Doshay says that this relatively low rate is primarily because of cost. 

Stock options are designed to allow employees to buy into their company’s ownership at what will theoretically be a discounted price. But exercising options can still require a lot of cash. Many employees decide that the cost of acquiring their vested options is not worth the potential benefit those options may provide. 

“Exercising options is expensive,” Doshay says. “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.” 

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Why employees are exercising fewer options today

In recent years, this calculation has shifted. Doshay says that one of the primary reasons employees are exercising a smaller percentage of their vested stock options is that, in many cases, those options aren’t worth as much as they used to be. 

With the onset of the venture slowdown in 2022, median valuations began to decline at most stages of startup life. In some cases, those valuations haven’t yet recovered. Even if the options an employee holds today are in the money, the potential profit margin from exercising those options might be smaller than employees would have expected three or four years ago. 

In other cases, valuations have fallen so low that the options employees received when they were hired are now underwater—that is, the current value of the options is less than the initial strike price. Employees in this group have even less financial incentive to exercise. 

In addition to declining valuations, Doshay notes that many startups have dealt with layoffs or some other financial struggles since the market turned in 2022. These sorts of public obstacles can deflate employee confidence in a company’s long-term future, which may deter those employees from exercising vested options. 

“As an employee making this sort of decision, you have to believe in the future outcome being much bigger than the current position,” Doshay says.

Doshay also points to the fact that many startups in the 2020s are choosing to stay private for longer periods of time—well over a decade, in some cases—which can create uncertainty for employees with vested options. 

Exits are the primary pathway through which employees can sell their exercised shares and actually turn their equity into a cash profit. Longer timelines to exit can result in a higher opportunity cost for employees who choose to lock up capital by exercising their vested shares. 

Instead of exercising options, some employees choose to invest their available capital in other areas, such as public stocks. This option may have been particularly appealing in 2024, when major public stock indexes rose by more than 20%. Employees must decide that exercising options is the best long-term use of their money.  

“It’s not necessarily a three-year or four-year investment anymore,” Doshay says. “It could end up being a decade-plus investment. You just don’t know.” 

Shifting attitudes toward options and exits

Stock options have traditionally been a significant tool that startups use to attract high-end talent. If employees are choosing to exercise at a lower rate, does that mean options are losing their appeal? And if so, how should companies adjust? 

Doshay believes that equity can and should continue to be an integral part of the compensation package. To maximize its value, however, she thinks companies might benefit from getting creative.

Historically, an exit is the main way that employees are able to cash out their exercised shares. And an IPO is historically seen as the most sought-after type of exit. But as exits in general and IPOs in particular become more scarce, executives can’t always rely on these first-choice options. Pursuing some type of secondary transaction can be another way for startups to help their employees realize the theoretical value of their vested equity. 

“Companies in general should get comfortable with the notion of exits as a broader category,” she says. 

If they do, effectively communicating this comfort to both current and potential future employees could give companies an edge over the competition. In 2025, simplifying issuing stock options to employees might not be enough; companies need to provide a path for employees to sell their vested options, too. 

“I don’t think people would count out equity as a viable part of the compensation package,” Doshay says. “But I think that they need to be clear about the different channels through which liquidity could actually happen.”

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