How You Can Take Advantage of Your Employee Stock Options

It’s the dream of any freshly-hired startup employee: Start with stock options in your fledgling company, work hard to see that company become a success and reap the rewards of your equity with a handsome post-IPO payday. Real-world stories of employees at world-famous startups like Lululemon securing $1.5 million from their stock options are not only possible to replicate, but create incentives in the mind of many.

Yet these stories can often seem like they come from a different era. In 2023, we hear less about startup unicorns and more about layoffs across the tech sector. These economic headwinds can push focus away from stock options—to the detriment of employees who can truly benefit from exercising these benefits.

Why Employees Don’t Exercise Their Options

It’s estimated that only half of employees understand the benefits their employers offer, and stock options are among the more complex perks available to an employee. Unlike health insurance, which workers use as needed, or retirement accounts which are paid into every month, stock options remain something to be accessed in the future, potentially forgotten in an employee’s day-to-day life.

This can become an issue if the stock options reach their expiration date, which is typically ten years after the agreement’s start date. Employees who leave, retire, or get laid off have a much shorter window of time to exercise—only 90 days to purchase their options before their options expire.

In either case, only public companies offer a readily available path to selling stock options. With stock options from a private company, employees are limited to the private market, where the buyer sets the price, and often completely restricted from taking part in any sales. This presents startup employees with a dilemma: pay an often hefty sum to purchase your hard earned equity OR let the options expire.

The prospect of exercising stock options within 90 days of a major event—layoff, retirement, or changing jobs—is understandably daunting, particularly when the options are from a private company. Moreover, many employees are discouraged by the tax liability involved with exercising options. The notion that they’d have to pay taxes on their stock options can dissuade them from an eventual payday.

“You are always ahead, even when you need to pay taxes. Most companies provide the option when you are exercising your options to have taxes taken out. This is another item often missed by ex-employees. Always elect to have taxes taken out at that time. This elevates the large tax bill and maybe penalties at the end of the year when you file your taxes,” Jim Cichanski, founder and CHRO of Flex HR, reports to Forbes.

With all that in mind, it’s no wonder that the majority of employee stock options expire unexercised.

How To Exercise Your Stock Options

The problem of unexercised stock options is only getting worse. Just 26% of eligible employees exercised their stock options in Q2 of 2023—the fifth straight quarter of decline, down from a peak of 46% in 2021. Even in the pre-pandemic “hot money” era of low interest rates, between 2018 and 2020, the number of employees exercising their options hovered around 33%.

That means a full two-thirds of employees avoided exercising their options due to reluctance around taxes and fees, or simply through a lack of education. Nowadays, the lowered value of tech stocks resulting from economic tumult have made exercising options less appealing—yet letting options expire is no solution here.

When an employee faces their expiration date without the resources to exercise, pay taxes, and potentially navigate the private market, they still have a lucrative path forward. Scott Chou, Founder at ESO Fund, explains how his company helps people exercise their stock options without taking on any risk:

“Stock options holders don’t have to go it alone. We can take on the risk for them, helping to pay the taxes and turn their equity into cash. All of this is risk-free: Employees remain owners of their shares throughout the entire process,” he states.

Why Stock Options Matter

Letting your stock options expire is no solution to whatever comes next. Turning equity into cash allows people to pursue their goals, whether that’s home ownership, investing in other assets, or simply taking a much-deserved dream vacation.

Exercising your options can be the bridge between where you are now and where you want to be in the future. Uncertainty and fees have kept many employees from exercising their options in the past, but anyone with stock options can benefit. All it takes is a little knowledge, and sometimes a partner to help guide you along the way to a better, more financially stable future.