“When should I exercise my company stock options?”
The answer is simpler than you might think…
DON’T BUY THE APPLE SEEDS. BUY THE TREE.
Pretend I make you an offer to buy an apple tree for $1,000 at any time, whether you buy it right after the seeds are planted or in 5 years when it bears fruit.
If the cost doesn’t change, you shouldn’t buy it before it bears fruit.
Doing so locks up $1,000 and gets you the same number of apples as if you had waited.
In the meantime, that $1,000 isn’t earning anything.
It’d be better to throw that $1,000 in a money market fund earning 5% annually. It would grow to $1,276 in 5 years.
You could then buy the apple tree “as late as possible”, immediately start selling apples, AND keep $276 in your pocket.
The cost to exercise your options won’t change whether you do it as soon as they vest or if you wait 5 years right before a liquidity event.
So buy the tree, not the seeds.
THE TAXES (talk to your tax gal/guy)
“As late as possible” is 12 months before a liquidity event (IPO or acquisition).
To be clear, this only applies to Incentive Stock Options (ISO’s), not Non-Qualified Stock Options (NSO or NQSOs), so double-check what you’ve got, but there’s a 95% chance they’re ISO’s.
The only two dates you need to know are 1. the grant date and 2. the exercise date.
If you sell the stock 2 years after the grant date and 1 year after the exercise date (when you “buy” the shares), then you’ll pay long-term capital gains on the difference between the exercise price and the sales price.
But talk to your tax professional before doing anything.
So don’t waste your money buying apple seeds if you can buy a fully-grown tree for the same price.
