You're a senior employee at a VC-backed private company, and you're facing a pivotal moment. You've decided to leave, or perhaps the decision was made for you. Either way, you're now staring down a 90-day window to exercise your Incentive Stock Options (ISOs). But here's the kicker: there's no clear exit timeline for your company. This isn't just a company policy; it's an IRS rule. And it's not just a formality — it's a ticking clock.
What happens to ISO stock options when you leave a private company?
Why the 90-Day Rule Exists
The 90-day expiration window for ISOs isn't something your company dreamed up. It's an IRS requirement. When you leave your job, you have 90 days to exercise your ISOs or they will expire. Miss this window, and those options become worthless. It's like watching your hard-earned potential gains evaporate right before your eyes.
The Liquidity Challenge in Private Companies
Exercising options in a private company isn't as straightforward as it might be in a public one. In a public company, you could sell shares to cover the exercise cost and any tax bill. But in a VC-backed private company, your shares aren't liquid. You can't just sell them off easily. The exercise cost is real cash out of your pocket today for an asset that can't be monetized until an unpredictable future liquidity event. It's a tough pill to swallow when there's no guarantee of a payout anytime soon.
Making the Exercise Decision Under Pressure
Deciding to exercise your options isn't just about the math. It's about your household's liquidity. How much cash are you willing to part with now, knowing you might not see a return for years? And don't forget the potential Alternative Minimum Tax (AMT) implications. Once you leave, you’ll be in the dark with what’s going on at your former company.
Pro-Tip: If you are leaving a VC-backed company with in-the-money ISOs, your first call is not to the new employer's HR department. It is to someone who can evaluate whether exercise makes sense for your household, and if so, how much. This is an investment decision that requires close consideration of household liquidity, all of your other financial priorities, and the trajectory of your former employer towards an eventual exit.
If you'd like to explore whether ongoing financial planning and investment management make sense for your situation, you can schedule an intro call here:
Common Questions
Do ISO stock options expire when I leave a company?
Yes, if you don't exercise them within 90 days, they expire and become worthless.
Can my ISOs be converted to NSOs if I miss the 90-day exercise window?
While it is possible for ISOs to be converted to NSOs (non-qualified stock options), it is not customary that the company would agree to make this change, and their approval is required.
What is the tax impact of exercising ISOs at a private company after resignation?
Exercising ISOs may trigger the Alternative Minimum Tax (AMT), and without a liquidity event, you may face a significant tax bill without a way to sell shares to cover it. When you exercise and hold ISOs through the end of the year, they are an AMT adjustment that can lead to a tax bill from exercise alone.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, business owners, physicians, and those seeking financial planning services.