Equity 101

Key takeaways

  • You’ll first need to exercise your stock options and convert them into shares before you can sell your equity.

  • It is sometimes possible to sell shares in a privately held company before an IPO; however, you could lose out on the future potential upside. 

  • Ideally, minimize what you might owe in taxes by optimizing for long-term capital gains. 


Selling your equity

You have vested a bunch of stock options — way to go! 👏 Handclap emojis all around.👏

Now, you're asking yourself “How do I sell my startup stock options?

You know your stock options have real value, but until you convert them into shares and then into cash, it’s hard to realize that compensation.

For many people, it makes sense to wait for an initial public offering (IPO) and maximize the upside of selling their shares. For others, it makes sense to sell their shares sooner so that value can be used for something else, like a down payment for real estate.

It’s important to understand what you can and cannot sell. You cannot sell stock options but you may be able to sell shares in your company. That means you’ll first need to exercise your stock options and turn them into shares before moving forward with a sale.

👉 Watch a recent Vested event “Sell or Hold Your Pre-IPO Shares?” on how to evaluate the potential of selling pre-IPO shares in 2022.

Step One: Exercise your stock options

You can only exercise what you have vested, likely after you have met the one-year cliff. Our rule of thumb is only to exercise when it makes sense.

🤓 When should you consider exercising? 

1) When you’re leaving your company and you’re in your 90-day post-termination exercise (PTE) window.

2) When you need to start the clock for tax reasons before a liquidity event.

3) When you can qualify under Qualified Small Business Status. 

Your cost to exercise will be your strike price * the number of vested stock options, plus potential taxes (AMT or ordinary income tax depending on the type of stock option you own.) 

If you have multiple option grants, you may also have different strike prices — and you may want to exercise some but not all of your vested options, depending on the cost to you.

To exercise your stock options, you might either use your own cash savings to cover the cost or get outside funding, such as option funding from Vested. 

👉 Learn more about how option funding works to cover the cost of exercising your stock options.

Step Two: Consider taxes

Only you can determine your own matrix of opportunity cost, your liquidity needs, and where share value for your company is headed. 

In many cases, you’ll owe some type of tax upon exercising your incentive stock options (ISOs) or non-qualified stock options (NSOs). After that, you’ll likely face capital gains depending on when you sell your shares (whether on a public or private market.)

You'll owe short-term capital gains if you exercise and then sell your shares in less than a year. However, that could be well worth it if the price you have today may not be around later. If you exercise your stock options and hold those shares for one year or more before selling, you’ll qualify for long-term capital gains when you sell them.

👉 Learn more about capital gains taxes and your stock options.

Step Three: Decide whether to hold or sell or hold your shares.

Now you can decide whether to sell your shares pre-IPO or see what happens with your company’s share value over time. 

If you’re thinking about selling your shares before an IPO, you’ll need to consider a few things:

  1. Are there any transfer restrictions from your company? Each company has its terms and conditions for its shares. You’ll want to research that they allow you to make a secondary sale first. In most cases, you’ll also need to give your company  the opportunity to exercise its “right of first refusal” (ROFR) (where they have a chance to buy your shares at the same price.)

  2. What is the market doing? Are there more buyers than sellers? Or are shares for your company selling at a price you will be happy with today? The market appetite for your shares can vary.

  3. What is the right kind of transaction for you? Be aware that most secondary markets are likely to only consider deals that are at least $100,000 in size; if your deal is smaller than that, you could consider asking former co-workers if they want to band together for a potential sales deal.

There is nothing wrong with wanting to get some cash from your equity sooner than an IPO. In fact, some companies conduct tender offers — where investors or the company offers to buy back employee shares, which is another way employees can get some liquidity. For example, software company Notion completed a tender offer with investors Sequoia and Index Ventures in July 2022.

In the end, you’ll want to think through the decision carefully — you’ll trade off future upside for cash today. 

This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for investment, tax, legal, accounting, or other professional advice. Vested does not provide investment, tax, legal, accounting, or other professional advice. You should consult your own investment, tax, legal, accounting, or other professional advisors before engaging in any transaction or equity decision.  


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