Model your equity value across exit scenarios, understand dilution, liquidation preferences, and compare ISO vs NSO tax treatment
Model your equity value across exit scenarios
| Exit Valuation | Price/Share | Gross Value | After Preferences | Your Take (Pre-Tax) | Your Take (Post-Tax) |
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This calculator models the potential value of your stock options across different exit scenarios, accounting for dilution, liquidation preferences, and tax implications. Understanding these mechanics is crucial for making informed decisions about exercising options and evaluating equity compensation.
Your ownership percentage is calculated by dividing your vested shares by the total shares outstanding on a fully diluted basis. The fully diluted share count includes all outstanding shares, vested and unvested options, and any other convertible securities. This gives you a realistic picture of your slice of the company pie.
For example, if you have 10,000 options with 50% vested (5,000 shares) out of 10,000,000 total shares, your ownership is 0.05%. This percentage is then adjusted for expected future dilution to model your ownership at exit.
Future funding rounds and option pool refreshes will dilute your ownership percentage. The calculator applies your expected dilution rate to project your ownership at exit. A typical early-stage startup might experience 15-25% dilution per funding round, so a company raising 2-3 more rounds could see 40-60% total dilution. Your diluted ownership equals: Current Ownership x (1 - Dilution Rate).
Liquidation preferences give investors priority in exit proceeds. The calculator models two common structures:
The calculator models taxes differently for ISOs and NSOs:
The spread between your strike price and FMV at exercise is an AMT preference item for ISOs. If this spread is large, you may owe AMT in the year of exercise even though you haven't sold the shares. The calculator provides a simplified AMT estimate, but actual AMT liability depends on your complete tax situation. Large ISO exercises warrant consultation with a tax professional.
The breakeven exit valuation is the minimum company valuation at which your options have positive value after accounting for exercise cost, liquidation preferences, and dilution. Below this threshold, investors take all proceeds through their liquidation preferences, leaving nothing for common shareholders. Understanding your breakeven helps evaluate whether staying for equity upside makes financial sense.
When considering a startup job offer, the equity component can be challenging to value. Use this calculator to model what your options might be worth under different exit scenarios. Enter the company's current valuation, your option grant, and realistic assumptions about future dilution and exit multiples. This helps you compare the equity value to offers from other companies or public company RSUs where the value is more certain.
Remember that startup equity is highly uncertain - most startups fail or exit below preference thresholds. Weight your expected value accordingly and don't accept a significant salary cut for equity unless you understand and accept the risk.
If you're leaving a company or approaching the end of your post-termination exercise period, you need to decide whether to exercise your vested options. This calculator helps you understand the exercise cost, potential AMT liability (for ISOs), and the exit valuations needed for your options to be profitable. If the company needs to achieve unrealistic multiples for your options to have value, or if the exercise cost and tax burden are prohibitive, it may not make sense to exercise.
If you hold ISOs and are considering early exercise or exercise before an exit, use this calculator to estimate potential AMT exposure. The spread between strike price and current FMV determines your AMT preference item. By modeling different exercise quantities and timing, you can plan exercises to stay below AMT thresholds or spread exercises across multiple years. This is especially important when 409A valuations are rising rapidly.
When your company receives an acquisition offer, the headline price doesn't tell the whole story. Liquidation preferences can consume significant proceeds before common shareholders receive anything. Use this calculator to model how different acquisition prices translate to actual payouts for your shares. This helps you understand whether to advocate for higher prices, participate in secondary sales, or accelerate vesting negotiations.
When offered additional option grants as retention or promotion incentives, use this calculator to evaluate their potential value relative to alternatives like higher salary or RSUs at a larger company. Factor in the new grant's strike price, vesting schedule, and how dilution will affect both new and existing grants. Sometimes a smaller grant at a lower strike price is more valuable than a larger grant at a higher price.
If you have the opportunity to sell vested shares in a secondary transaction, this calculator helps you evaluate whether the offered price represents fair value. Model what your shares might be worth at IPO or acquisition, discount for time value and risk, and compare to the certain liquidity of a secondary sale. Secondary sales also trigger tax events, so factor in the immediate tax cost versus potentially more favorable treatment at a future exit.
Stock options give you the right to purchase shares at a fixed price (the strike or exercise price), but you're not required to do so. If the stock price exceeds your strike price, your options are "in the money" and have value. If not, they're "underwater" and worthless. Restricted stock or RSUs, by contrast, represent actual share ownership that vests over time - they have value as long as the stock has any value above zero.
ISOs are only available to employees and offer preferential tax treatment. If you hold the shares for 1+ year after exercise and 2+ years after grant (a "qualifying disposition"), gains are taxed at long-term capital gains rates rather than ordinary income. However, the spread at exercise is an AMT preference item, which can trigger Alternative Minimum Tax. ISOs also have annual exercise limits ($100,000 based on grant-date FMV) and expire 3 months after employment ends (or 1 year for disability).
NSOs can be granted to anyone - employees, contractors, advisors, board members. The spread between strike price and FMV at exercise is taxed as ordinary income, subject to federal, state, and FICA taxes. This income also appears on your W-2 (for employees) or 1099 (for non-employees). Any subsequent gains are taxed as capital gains, short or long-term depending on holding period. NSOs have no AMT implications and no annual limits.
A 409A valuation is an independent appraisal of company common stock fair market value, required for setting option strike prices. Options must be granted at or above 409A FMV to avoid immediate taxation and potential penalties under IRC Section 409A. The 409A value is typically lower than preferred stock prices because common stock lacks dividend rights, liquidation preferences, and anti-dilution protections. Companies typically obtain new 409A valuations annually or after significant events like funding rounds.
Most stock options vest over time according to a vesting schedule. The standard is 4-year vesting with a 1-year cliff: nothing vests until your one-year anniversary, then 25% vests immediately, with the remaining 75% vesting monthly over the next 3 years. Some companies use 3-year vesting, different cliff periods, or performance-based vesting. Unvested options are typically forfeited upon termination.
The exercise (strike) price is the amount you pay per share to exercise your options. The "spread" is the difference between current FMV and your strike price. A larger spread means more value but also more tax liability at exercise (especially for NSOs or ISOs subject to AMT). Options with strike prices above current FMV are "underwater" and have no intrinsic value.
Liquidation preferences give investors priority in exit proceeds. A "1x non-participating" preference means investors get their investment back before common shareholders receive anything, then convert to common to share remaining proceeds. A "1x participating" preference means investors get their investment back AND share in remaining proceeds - effectively double-dipping. Multiple preferences (2x, 3x) and participation rights significantly reduce common shareholder payouts in exits below certain thresholds.
Dilution occurs when companies issue new shares, reducing existing shareholders' ownership percentages. Common dilution events include new funding rounds, option pool expansions, and employee equity grants. Anti-dilution provisions protect investors from certain types of dilution (particularly "down rounds" at lower valuations) but don't typically protect common shareholders or option holders. Plan for 15-25% dilution per funding round in your projections.
When you leave a company, you typically have 90 days (sometimes longer) to exercise vested options before they expire. This creates a significant financial decision: pay the exercise cost and any taxes to keep your equity stake, or let options expire worthless. Some companies offer extended exercise periods (up to 10 years) as a retention benefit. Understanding your post-termination exercise period is crucial before accepting an offer or planning a departure.
The most common mistake is treating unrealized option value as actual wealth. Your options are only worth something if the company achieves a successful exit at a price above liquidation preferences, you exercise before expiration, and you can actually sell the shares. Many employees turn down job offers or accept below-market salaries based on inflated expectations of equity value, only to see options expire worthless or exit below preference thresholds. Value your equity conservatively and don't let it distort career or financial decisions.
When you leave a company, your options typically expire 90 days after your last day. This deadline is strict - missing it by even one day means losing all your vested options. Mark your calendar, set reminders, and make the exercise decision well before the deadline. If you can't afford to exercise, explore whether the company offers extended exercise periods or consider negotiating this as part of your departure.
Exercising ISOs with a large spread can trigger Alternative Minimum Tax even though you haven't sold the shares or received any cash. Employees have exercised ISOs worth millions on paper, incurred hundreds of thousands in AMT, then watched the stock price crash - leaving them with a huge tax bill and worthless shares. Always calculate potential AMT exposure before exercising ISOs, and consider exercising in multiple years or in amounts that stay below AMT thresholds.
Many employees don't realize that investors get paid first in an exit. If your company raised $50M with 1x liquidation preferences and sells for $60M, investors take $50M first, leaving only $10M for common shareholders and option holders to split. In a $45M exit, common shareholders receive nothing. Always factor liquidation preferences into your exit projections and understand your company's preference structure.
Your ownership percentage will decrease with every funding round and option pool expansion. A 0.1% stake today might be 0.05% by the time the company exits after two more rounds. Use realistic dilution assumptions (15-25% per round) when projecting exit value. Also understand that your percentage is of fully-diluted shares, not just currently outstanding shares.
The tax implications of option exercises are complex and can significantly affect your net proceeds. ISO vs NSO treatment, holding period requirements, AMT exposure, state tax rates, and timing all matter. Exercising without understanding these factors can result in paying much more tax than necessary or making suboptimal decisions. Consult a tax professional before exercising significant option holdings.
After exercising options and holding shares, employees often end up with an overwhelming concentration in employer stock. This violates basic diversification principles and creates correlated risk - if the company struggles, you could lose both your job and your savings simultaneously. Consider selling shares when possible (at IPO or through secondary sales) to diversify, even if you're bullish on the company.
Most candidates accept default option terms without negotiation. But terms like grant size, vesting schedule, early exercise provisions, and post-termination exercise period are often negotiable, especially for senior hires. Understanding what to ask for and having alternatives strengthens your position. Even small improvements like extended exercise windows can have significant value.
If your company allows early exercise (exercising unvested options), you can file an 83(b) election within 30 days to recognize income at exercise based on current value. This starts your capital gains holding period immediately, potentially converting future appreciation from ordinary income to long-term capital gains. The risk: if you leave before vesting, you've paid for shares you must forfeit. This strategy works best when the spread is minimal (near grant date), you're confident in both the company and your tenure, and you can afford the exercise cost and any immediate tax.
Rather than exercising all ISOs at once and triggering significant AMT, consider spreading exercises across multiple tax years. Calculate the maximum spread you can absorb each year without triggering AMT, then exercise that amount annually. This is particularly effective when 409A values are rising - exercising earlier at lower spreads reduces AMT exposure while starting your holding period sooner. Track your AMT credit carryforward to recover previous AMT payments in future years.
For ISOs, exercising and selling on the same day (a "disqualifying disposition") converts ISO tax treatment to NSO treatment - ordinary income on the spread, no AMT. While you lose the potential LTCG benefit, you also eliminate AMT risk and get immediate liquidity. This strategy makes sense when: the spread is very large and would trigger substantial AMT, you need liquidity now, or you're uncertain about the stock's future performance.
If you expect an exit event (IPO, acquisition) within 1-2 years, consider exercising ISOs now to start the holding period clock. To achieve LTCG treatment, you need to hold 1+ year after exercise. Exercising during the year before IPO lockup ends positions you for LTCG treatment when you can first sell. However, this requires confidence in the exit timeline and accepting the risk that the exit doesn't materialize.
Some plans allow "net exercise" where you use some shares to cover the exercise cost, receiving fewer shares but without out-of-pocket cost. "Cashless exercise" involves a broker loan to cover exercise cost, immediately selling enough shares to repay the loan. These mechanisms provide liquidity but may trigger different tax treatment - verify the implications with your plan administrator and tax advisor.
If your company qualifies as a small business (under $50M in gross assets at issuance) and you hold shares for 5+ years, you may exclude up to $10M or 10x your basis in gains from federal tax under IRC Section 1202. This can completely eliminate federal capital gains tax on qualifying gains. Requirements are complex and not all companies qualify, but the potential benefit is enormous. Verify QSBS eligibility with company counsel and plan accordingly.
Donating appreciated shares (held 1+ year) to qualified charities provides a deduction for full FMV while avoiding capital gains tax on appreciation. If you have exercised shares with large unrealized gains and charitable giving intentions, donating shares rather than cash maximizes tax efficiency. Donor-advised funds can accept appreciated shares and allow you to distribute to charities over time.
Stock option taxation varies significantly by state. California taxes all gains on options granted while working in California, regardless of where you live at exercise or sale. Some states have no income tax. If you have flexibility in work location, understand the state tax implications for your equity. Moving from a high-tax state before exercising or selling can save significant taxes, but planning must be done carefully to avoid dual-state taxation.
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Comprehensive answers to common questions about stock options, taxation, and equity compensation planning.
Incentive Stock Options (ISOs) are only available to employees and offer preferential tax treatment - if you meet holding period requirements (1+ year after exercise, 2+ years after grant), gains are taxed at long-term capital gains rates. Non-Qualified Stock Options (NSOs) can be granted to anyone but the spread at exercise is always taxed as ordinary income. ISOs have no tax at exercise for regular tax purposes but may trigger Alternative Minimum Tax. NSOs trigger immediate taxation at exercise on the spread.
The strike price (also called exercise price) is the fixed price you pay per share when you exercise your options. It's set at the time of grant based on the company's 409A fair market value. Your profit is the difference between what the shares are worth when you sell and your strike price (minus taxes). Options are "in the money" when current value exceeds strike price and "underwater" when strike price exceeds current value.
A 409A valuation is an independent appraisal of common stock fair market value required by IRS regulations. Options must be granted at or above 409A FMV to avoid immediate taxation as deferred compensation. The 409A value is typically lower than preferred stock prices because common stock lacks liquidation preferences, anti-dilution protections, and other investor rights. Companies obtain new 409As annually or after significant events.
Vesting determines when you have the right to exercise your options. Standard terms are 4-year vesting with a 1-year cliff: after your first anniversary, 25% vests immediately, then the remaining 75% vests monthly over 3 years. Unvested options are forfeited if you leave the company. Some plans allow early exercise of unvested options, subject to repurchase rights if you leave before vesting.
Unvested options are typically forfeited immediately. Vested options remain exercisable for a limited post-termination exercise period, usually 90 days (but sometimes longer per your option agreement). If you don't exercise before this window closes, vested options expire worthless. Some companies offer extended exercise periods as a benefit. Termination for cause may result in immediate forfeiture of all options.
For NSOs, you pay ordinary income tax at exercise on the spread (FMV minus strike price). For ISOs, there's no regular income tax at exercise, but the spread may trigger AMT. When you sell shares, you pay capital gains tax on any additional appreciation (or claim a loss if the stock declined). The holding period determines short-term vs long-term capital gains rates.
AMT is a parallel tax system that disallows certain deductions and adds back certain income. For ISOs, the spread at exercise is an AMT "preference item" - it's added to your taxable income for AMT purposes. If your AMT liability exceeds regular tax, you pay the higher amount. However, you receive an AMT credit carryforward that can reduce future taxes. Large ISO exercises often trigger AMT.
A qualifying disposition occurs when you sell ISO shares after holding them 1+ year from exercise AND 2+ years from grant. Gains are taxed entirely at long-term capital gains rates. A disqualifying disposition is any sale that doesn't meet these requirements - the spread at exercise is taxed as ordinary income (like an NSO), and only additional gains receive capital gains treatment.
For NSOs, multiply the spread (shares x (FMV - strike price)) by your marginal tax rate (federal + state + FICA). This is added to your income for the year. For ISOs, calculate potential AMT by adding the spread to your regular taxable income and applying the 26%/28% AMT rates. Compare to your regular tax - you owe the higher amount. Make quarterly estimated payments to avoid underpayment penalties.
Qualified Small Business Stock (QSBS) under IRC Section 1202 can exclude up to $10 million or 10x your cost basis in federal capital gains tax. Requirements include: company had under $50M in gross assets at issuance, stock was acquired at original issuance (not secondary), company is a C-corp in a qualified business, and you held shares for 5+ years. State treatment varies. This can completely eliminate federal taxes on qualifying gains.
Liquidation preferences give investors priority in receiving exit proceeds. With 1x non-participating preference, investors receive their investment back first, then choose to convert to common or not. With participating preference, investors get their preference AND share in remaining proceeds. In smaller exits, preferences can consume all proceeds, leaving nothing for common shareholders and option holders. Always factor preferences into exit projections.
Dilution reduces your ownership percentage when the company issues new shares through funding rounds, option pool expansions, or other issuances. If you own 0.1% and the company dilutes by 20%, you now own approximately 0.08%. While your percentage decreases, the goal is for company value to increase faster, making your smaller slice worth more in absolute dollars. Plan for 15-25% dilution per funding round.
Your breakeven is the minimum exit valuation at which your options have positive value after exercise cost, dilution, and liquidation preferences. Below this threshold, investors receive all proceeds through their preferences. Calculate by determining: at what valuation does (proceeds remaining after preferences) x (your diluted ownership) exceed your exercise cost? This helps evaluate whether exercising makes financial sense.
Exercising ISOs before IPO starts your holding period clock for LTCG treatment. If you exercise 1+ year before the IPO lockup ends, you can sell at LTCG rates when the lockup lifts. However, you take on risk (company might not IPO) and potential AMT liability. For NSOs, there's less timing benefit since the spread is always ordinary income. Consider exercise cost, AMT exposure, and your confidence in the IPO timeline.
Consider: (1) Exercise cost - can you afford it? (2) Tax implications - what's the immediate tax hit? (3) Company prospects - is the upside worth the investment? (4) Liquidity timeline - when might you be able to sell? (5) Concentration risk - how much of your wealth is in this stock? (6) Opportunity cost - what else could you do with the money? Exercise makes sense when you believe in the company, can afford the cost and taxes, and the exit valuation required for profit is achievable.
An 83(b) election on early-exercised options recognizes all income immediately at current value, starting your capital gains clock. Benefits: potential for all future gains to be LTCG, possible QSBS qualification. Risks: if you leave before vesting, you've paid for shares you forfeit; if the company fails, you've lost your exercise cost. It's best when: spread is minimal, you're confident in both company and your tenure, and you can afford the cost. File within 30 days of exercise.
Calculate potential value under multiple exit scenarios (2x, 5x, 10x current valuation), factor in realistic dilution (30-50% if several rounds from exit), discount for probability of success (most startups fail), and compare to guaranteed compensation you're giving up. Value equity at maybe 10-30% of projected value given uncertainty. Don't accept significant salary cuts for equity unless you understand and accept the risk profile.
Negotiable terms include: number of options, vesting schedule acceleration (single or double trigger), extended post-termination exercise period (beyond 90 days), early exercise rights, and refresher grants. For senior roles, also negotiate strike price timing relative to upcoming 409A increases, and provisions for exercise in change of control. Get commitments in writing - verbal promises have no value.
Depends on deal structure and your option agreement. Options may be: (1) Cashed out at acquisition price minus strike price, (2) Converted to acquirer options at equivalent value, (3) Accelerated and cashed out, or (4) Assumed with continued vesting. Unvested options may vest partially or fully under "acceleration" provisions. Check your agreement for single-trigger (acceleration on acquisition) or double-trigger (acceleration only if you're terminated) provisions.
Most private company shares are subject to transfer restrictions and right of first refusal, meaning you need company consent to sell. Some companies facilitate secondary sales or tender offers where employees can sell to approved buyers. You cannot sell unexercised options - only the company can grant new options. If secondary opportunities exist, evaluate the offered price against potential future value and your liquidity needs.
Underwater options (strike price above current FMV) have no intrinsic value but may have time value if the company's prospects could improve. You might: (1) Wait and hope for value recovery, (2) Ask the company about option repricing or exchange programs, (3) Negotiate additional grants at current lower 409A values. Don't exercise underwater options - you'd pay more than the shares are worth. They may still vest and become valuable later if the company succeeds.
State tax treatment varies significantly. California taxes gains on options granted while working in California regardless of where you live at exercise/sale. Some states (TX, FL, WA, NV) have no income tax. Moving before exercise or sale can affect tax liability, but rules are complex and states may still claim taxing rights. Remote work arrangements create additional complexity. Consult a tax professional for multi-state situations.
Need personalized guidance on stock options, equity compensation, exercise planning, or tax strategies? I offer consultations for California clients on equity and corporate matters.