You're leaving a VC-backed private company. Whether it's for a new opportunity or because the new CEO wants their own team, you're now facing a critical decision. What to do with your Incentive Stock Options (ISOs)? The 90-day window to exercise those options is ticking, and it's not just company policy—it's an IRS rule. Miss it, and those options could become worthless.
What happens to ISO stock options when you leave a private company?
What the 90-Day Window Really Means
Many employees at VC-backed companies know about the 90-day window for exercising ISOs, but few realize it's an IRS requirement, not a company policy. This distinction is crucial. If you exercise within 90 days of leaving, you retain the ISO tax treatment for a future qualifying sale. Miss the window, and your options expire, becoming completely worthless. It doesn't matter how much the stock has appreciated—without action, those gains vanish.
The Challenge of Exercising in a Private Company
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 during the next trading window to fund the exercise and cover any tax bill. But in a VC-backed private company, that's not an option. Shares can't be easily sold, if at all, and even if they can, it usually requires company authorization. The exercise cost is real cash leaving your household for an asset that can't be monetized until a liquidity event, which may be years away—or might never happen.
Making the Exercise Decision Under Pressure
Deciding whether to exercise your options under this time pressure is complex. It involves evaluating how much cash you're willing to commit today to cover the exercise cost and potential Alternative Minimum Tax (AMT) if you have ISOs, or ordinary income tax if you have Non-Qualified Stock Options (NSOs). All this for equity in a company you no longer work for, with no defined path to liquidity. After leaving, you'll have no access to internal company projections or updates until it goes public or gets acquired. The clock doesn't stop while you figure this out, and you're likely also negotiating a new job offer or processing an unplanned departure.
The stakes are high. Inaction means losing the potential value of your options. Making an informed decision within the 90-day window is crucial to avoid regret later. Consider seeking professional guidance to evaluate your options thoroughly.
Pro-Tip: If you are leaving a VC-backed company with in-the-money ISOs, the 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, ISOs typically expire 90 days after you leave a company unless exercised within that timeframe.
Can my ISOs be converted to NSOs if I miss the 90-day exercise window?
No, if you miss the 90-day window, the options expire and cannot be converted to NSOs.
What is the tax impact of exercising ISOs at a private company after resignation?
Exercising ISOs can trigger the Alternative Minimum Tax (AMT), which requires careful planning, especially in a private company where liquidity is not immediate.
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.