If you’ve received stock options as part of your compensation package, there’s one big decision that sits between getting those options and figuring out what to do with them: whether or not to exercise stock options.
And while that decision might feel intimidating, it’s important to know that doing nothing—at least at first—is often perfectly fine.
In fact, not exercising your options right away might actually be the smart move.
Let’s walk through exactly what happens when you don’t exercise your stock options, what you risk (and don’t), and how expiration can sneak up on you. Especially in today’s world of delayed IPOs and evolving liquidity timelines.
At First? Nothing Happens.
Let’s say you start a new job and you’re granted a batch of stock options as part of your new hire equity package.
Those options begin to vest over time as you work at the company. You’re gradually building up the right to exercise a larger and larger portion of your total grant.
But if you don’t take action right away? That’s totally fine.
While you’re still employed and the options are vesting, doing nothing costs you nothing.
There are no tax consequences just because your options are vesting. No penalties. No problems. You’re simply accumulating more rights to exercise stock options.
And for many people, waiting is actually the better strategy, especially in the early years.
Why Waiting Can Be a Good Plan
There are three big reasons why doing nothing (for now) can work in your favor:
1. You Keep the Leverage
Stock options are a form of financial leverage. You have a fixed strike price—the cost to purchase the stock never changes—but the upside potential is unlimited. As long as you haven’t exercised, you haven’t committed your own money. That means you still hold all the potential upside without giving anything up.
Once you exercise, though, that leverage is gone. You’re now holding stock you paid for, and the game changes.
2. You Save Cash
Exercising options costs money. Depending on how many shares you’ve vested and what the strike price is, that can add up quickly. And again—until the company is public or gets acquired—you might be tying up cash in something you can’t sell.
3. You Avoid Uncertain Tax Consequences
Exercising could also trigger taxes—specifically the Alternative Minimum Tax (AMT) if you’re dealing with incentive stock options (ISOs).
But here’s the kicker: if the company isn’t public yet, you won’t know when (or even if) you’ll be able to sell the stock to cover that tax bill.
That’s a big gamble. For many people, the risk of paying taxes today on something they can’t yet liquidate makes waiting the better move.
The Catch: Stock Options Expire
Eventually, though, doing nothing stops being a neutral move and starts being a risky one. Stock options don’t last forever.
There are two main ways your options can expire: time and employment status.
Time-Based Expiration: The 10-Year Rule
Most stock option grants come with a 10-year expiration timeline. That means if you were granted stock options on June 1, 2015, and you haven’t exercised them by June 1, 2025, they’re gone. Poof.
We’ve seen cases where someone hits that 10-year mark and didn’t realize it was approaching. If they don’t act before that date, those unexercised options just… disappear.
Historically, this wasn’t a huge issue because the assumption was that within 10 years, your company would either succeed (and go public) or fail.
But in today’s market, we’re seeing more and more 11- and 12-year-old startups that still haven’t gone public. That’s where things get dicey.
If you’re in year eight or nine of your option grant, still working at the company, and still unsure about a liquidity timeline? This is when you want to start planning.
Employment-Based Expiration: The 90-Day Rule for ISOs
The other key expiration trigger is leaving the company.
If you leave, the timeline shortens, Sometimes drastically.
For ISOs, the tax code requires you to exercise within 90 days of leaving the company in order to keep the ISO treatment.
Miss that window, and your options either expire, or convert to non-qualified stock options (NQSOs) if your agreement allows.
That 90-day window has been the default for a long time. But in recent years, more companies are offering what’s called an Extended Post-Termination Exercise Period (PTEP). This gives you more time to decide what to do, even after you’ve left the company.
Here’s how it usually works:
- You leave the company.
- You have 90 days to exercise and retain ISO status.
- If you don’t exercise within 90 days, your options convert to NQSOs.
- You may then have several more years—sometimes up to the original 10-year mark—to exercise those NQSOs.
We’ve worked with many clients in this exact situation. In some cases, they’ve had up to seven years post-employment to exercise, thanks to the extended PTEP baked into their option agreement.
But Watch for This: Liquidity Events That Trigger Expiration
Even if you have a generous extended window, there’s another curveball: some companies accelerate expiration once a liquidity event happens, like an IPO or a change in control.
We’ve seen this firsthand.
For example: a client has a seven-year post-employment window in their stock option agreement. But when the company IPOs, the agreement says they have just nine months post-IPO to exercise or lose those options.
That’s a huge shift, and if you weren’t paying attention to that clause, it could take you by surprise.
Bottom line? Always read your stock option grant agreement. Know what events – IPOs, acquisitions, mergers -could suddenly shorten your timeline.
Delayed IPOs and the 10-Year Cliff
We mentioned this earlier, but it’s becoming more common and more important: delayed IPOs are putting pressure on long-term employees whose stock options are nearing expiration.
It’s especially frustrating if you’re still working at the company but have no visibility into when, or if, a liquidity event is coming.
If you’re in this situation, it’s worth having a conversation with your employer.
Some companies are starting to offer creative solutions, like:
- Exchanging expiring options for RSUs
- Allowing extended PTEPs
- Letting options convert automatically to NQSOs
Options vs. RSUs: Understanding the Trade-Off
Let’s say your company agrees to exchange your expiring options for a new RSU grant. That can feel like a win, and in some ways, it is.
But it’s important to understand the value difference.
- Stock Options = Partial Value. You only get the value of the stock above your strike price.
- RSUs = Full Value. There’s no strike price. You get the full value of the share upon vesting.
Because of that, one RSU is generally worth more than one stock option. So when companies do this exchange, they use a conversion ratio to try to equalize the value.
You might give up 3,000 options and receive 2,500 RSUs in return, depending on your strike price and the stock’s fair market value.
The upside? You’re getting equity that doesn’t require cash to exercise and won’t expire in the same way.
TL;DR? Don’t Ignore the Fine Print
If you’ve got unexercised stock options and you’re still working at the company, you might feel like there’s nothing urgent to deal with. And for now, that could be true.
But expiration creeps up. IPOs can change the rules. And once you leave the company, your timeline can shrink dramatically.
Here’s what we recommend:
- Read your stock option grant agreement, especially the expiration clauses.
- Track key dates: grant date, vesting milestones, expiration timelines.
- If you’re approaching year 8 or 9, and your company is still private, start asking questions.
- Don’t assume you’ll be notified. You are your own best advocate.
Still unsure what to do?
That’s what we’re here for.
At KB Financial Advisors, we help tech employees make smart, confident decisions about equity. Whether that means exercising stock options, weighing an RSU exchange, or just making sense of your grant.
If you’re facing a tough decision or a looming expiration date, reach out. A quick introductory call could be all you need to save tens, if not hundreds, of thousands of dollars. You can use our calendar here.
Until next time!
