Working for a startup comes with significant benefits. For many startup employees, it also comes with equity. And while the opportunity to become a stakeholder can be exciting, navigating equity decisions is often confusing. In fact, one of the biggest questions startup employees face is when to exercise their options.

If you’re thinking of working for a startup, or you’re a current employee looking to make the most of your benefits, learning more about equity can help you determine what’s right for you. Below, we highlight some of the things to keep in mind when deciding whether to exercise your options.

Consider Your Future With the Company

Before you start thinking about what you want to do with your options, it’s important to think about how long you plan to stay with your current company. Do you intend to stick around for several years or are you planning to pursue other opportunities? More importantly, are your options fully vested, or are you still within the vesting period? If you do intend to leave your company in the near future, you’ll likely have a 90-day period to exercise your options. If you don’t exercise them within that time, you will forfeit your equity.

If you’re unsure about your plans for the future, weighing a few factors can help to crystallize your decision and determine what would work best for you.

Take Different Exit Scenarios Into Account

Going public or getting acquired is one of the most exciting moments for a startup, and it could have a significant impact on your equity. When thinking through your options, consider different exit possibilities to help inform your decision.

  • Heading for an IPO: If all signs point to your company going public, waiting for an exit could help you avoid out-of-pocket costs and simplify your tax situation. It’s worth noting, however, that this approach often requires that you pay higher taxes and there is usually a 90 or 180-day lock-up period which would prevent you from selling your shares immediately after the IPO. This period is even longer if your company goes public via a SPAC and you may need to hold on to your shares for up to a year.
  • Getting acquired: While exiting through an acquisition doesn’t require the same lock-up period as going public, there are many variables involved that could affect your options. Depending on whether you’re acquired by a public company or a private one, your options could also be converted in different ways.  
  • Business as usual: If it looks like your company isn’t planning an exit anytime soon, deciding whether or not to exercise comes down to your risk appetite and your ability to cover the costs. If maximizing your profit and minimizing equity loss are important factors, exercising ahead of an exit could be a good strategy.

Understand the Tax Implications

Once you have a clear sense of exit possibilities, it’s time to think about how exercising could affect your tax situation. Here’s where it can get a little tricky. Exercising after an exit is often the most straightforward scenario. Your payout will be taxed like ordinary income and you’ll be able to hold on to the profit.

Exercising before an exit carries different considerations. While you’ll need to make two separate tax payments—when you exercise your options and when you sell your shares—your overall tax liability will likely be lower. If you exercise at least 12 months before you intend to sell your shares, you’ll also reap the benefits of long-term capital gains which are taxed more favorably. However, you’ll need to have funds available to pay the initial tax bill as well as cover the cost of buying your shares.

Choose the Exercise Strategy That’s Right for You

Deciding whether to exercise your options requires careful consideration. Having the right resources at your fingertips can help you understand the full picture and determine what will work best for you. 

As a leading expert in startup equity, Secfi simplifies the equity equation and provides tools to help individuals make the most of their shares. Their Exercise Tax Calculator is a great place to start and offers insights into your potential payout. 

If you decide you’d like to exercise your options, Secfi also offers non-recourse financing which uses your equity as your only collateral. And if your company doesn’t have an exit, there is no need to repay. Tailored specifically to startup employees, Secfi offers the knowledge to help you make the right decision for your circumstances.

Equity can be one of the most exciting benefits of working for a startup, but knowing the best way to leverage it can feel overwhelming. Thinking through a variety of options is often the best bet. By taking into account your priorities and the company’s exit prospects, you’ll be able to make a decision that’s right for you.