The Unwanted Truth About Employee Stock Options: Most People Get Burned

The Employee Stock Option Timing Tightrope

A client came to me in a panic.

He had spent years building his career, accumulating stock options in his company along the way. Then he got an offer from a competitor. Exciting, but there was a problem: his company gave him 90 days to exercise his stock options or lose them (this is standard). Worse, he had no idea what it would cost in taxes.

By the time we ran the numbers, he realized exercising all of his stock options into company shares would trigger a tax bill so high he would need to take out a loan to cover it. He had no plan, and now, he was trapped. *This is the exact kind of high-stakes situation we help clients navigate at Simplify Wealth Planning.*

This happens all the time (like, honestly, way too much). Employees get stock options, assume they’ll figure it out later, and then find themselves in a situation where they end up either forfeiting all of their stock (i.e., leave with nothing) or paying way too much in taxes.

Let's make sure that doesn’t happen to you.

Why the Right Timing Isn't Just About Stock Price

You'd think the best time to exercise stock options is when the stock price is up. That’s only part of the equation. It’s also about taxes, risk, and liquidity, which are things most people overlook.

Here are the key factors to consider:

• Taxes – Most employees exercise without fully understanding how much they'll owe. A big mistake. Many of the stock options horror stories are because of the tax situation.

• Risk Exposure – If most of your personal wealth is tied up in your company’s stock, you're vulnerable. It’s extra risky if the company is still private. Diversification matters.

• Liquidity – Exercising means coming up with cash. If your shares aren’t public, you could be locked into illiquid stock for years. And there’s no guarantee the shares will ever become liquid or worth anything.

The Tax Trap That Catches Most People Off Guard

Taxes on stock options are not straightforward, and if you don’t plan for them, they will catch you by surprise.

• NSOs (Non-Qualified Stock Options) – Taxed as ordinary income at the time of exercise. Think of it as getting a massive paycheck. The tax situation is a bit more straightforward than ISOs.

• ISOs (Incentive Stock Options) – Potential for long-term capital gains tax (which is lower), but only if you follow strict holding period rules.

Then there’s Alternative Minimum Tax (AMT). AMT can hit ISO holders even if they don’t sell their shares. It’s a phantom tax, which can be triggered if you exercise too many ISOs in a single year.

There are endless stories of people not realizing what they’ve stepped into until tax season rolls around and they owe a five or six-figure sum to the IRS (with no liquid market to sell those shares into to help cover the tax bill).

Avoid that mistake by modeling out tax scenarios before you exercise.

Leverage my free 90 day countdown exercise calculator to help you. It includes a video walkthrough and is easy to follow.

Your Next Steps: Build a Smart Stock Option Strategy

People don’t fail on purpose. They fail because they don’t make a plan. Here’s what you should do instead:

1. Review Your Stock Option Grant

• Are they ISOs or NSOs?

• What are your vesting dates and expiration periods?

• Does your company have a 90-day window after termination? Look at your Equity Incentive Plan (the document outlining how your plan works)

2. Model Your Tax Impact Now

• Estimate your ordinary income tax from exercising NSOs.

• Check if you’ll be hit with AMT before exercising ISOs.

A tax surprise is never fun. Run the numbers ahead of time.

Leverage my free 90 day countdown exercise calculator to help you. It includes a video walkthrough and is easy to follow.

3. Avoid Overconcentration in Company Stock

• How much of your net worth is in a single stock?

• If your company struggles, will you be financially exposed?

A good rule of thumb: No more than 10-15% of your total portfolio should be in a single stock.

4. Plan for Liquidity

• How much will it cost to exercise?

• Do you have the cash, or will you need to explore other means to fund the exercise cost? The chart below will give you some alternative paths to explore.

Locking all your money into company stock without a way to sell is a dangerous move.

Meme Of The Week

The Bottom Line: Most People Get This Wrong. You Don’t Have To.

Stock options can be life-changing or a frustrating tax mess.

Most employees either:

• Wait too long and lose their options entirely (i.e., they forfeit them back to the company)

• Exercise without a plan and owe way more in taxes than necessary

The key is understanding your tax impact, diversifying your risk, and having a strategy before you make a move.

If you need help building that strategy, schedule a free consultation to secure your financial future.

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Simplify Wealth Planning, LLC (“SWP”) is a registered investment adviser in Texas and in other jurisdictions where exempt; registration does not imply a certain level of skill or training.

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