Should you exercise your stock options before leaving a job?

When you leave a startup, the clock starts: you usually have 90 days to exercise your vested options or lose them. And “exercise” means writing a real check — for the shares, and often for a tax bill on money you haven’t actually made yet.

This decision is hitting a lot of people right now. By mid-August 2026, tech layoffs had already passed the full-year 2025 total, which means a wave of employees are staring at a separation agreement and a 90-day countdown they may not fully understand. If that’s you, here’s how to think it through before the window closes.

The 90-day clock is real, and it’s an IRS rule

Most companies give departing employees 90 days after their last day to exercise vested incentive stock options (ISOs). This isn’t just a company preference you can negotiate away: the IRS mandates that ISO tax treatment expires 90 days after termination. Miss the window and your options either expire worthless or convert to non-qualified options (NSOs) and lose their favorable tax treatment.

Some companies have started offering extended windows — three, five, even ten years. But there’s a catch that sounds generous and isn’t entirely: extending past 90 days automatically converts your ISOs to NSOs, which are taxed less favorably. A long window is a trade-off, not a gift. Read your separation agreement for the exact deadline and whether any extension applies.

What it actually costs to exercise

Exercising isn’t a button you click. It’s a purchase. The cost has two parts.

Part one: the shares. You pay the strike price times the number of options you’re exercising, in cash, out of pocket. At a private company you generally can’t sell some of the shares to cover the rest (a “cashless exercise”). There’s no market to sell into. So you need the actual cash.

Part two: the tax. This is the part that surprises people, because you can owe tax without receiving a dollar.

• For ISOs, the spread between the fair market value and your strike price at exercise is an “adjustment” for the Alternative Minimum Tax. Exercise and hold through year-end, and that spread can push you into AMT: a tax bill on paper gains, with no cash in hand. This is the classic “AMT trap.”
• For NSOs, the spread is taxed as ordinary income at exercise: a bigger, more immediate hit, but no AMT surprise.

The AMT math depends on the 2026 thresholds. Per the IRS, the AMT exemption for 2026 is $90,100 for single filers and $140,200 for married couples filing jointly, phasing out at $500,000 and $1,000,000 respectively. Under the One Big Beautiful Bill Act, that phaseout is now steeper: you lose 50 cents of exemption per dollar over the threshold. Whether you actually owe AMT, and how much, comes down to the size of your spread against those numbers.

Rather than estimate it in your head, run your own numbers through the ISO exercise tax calculator. It takes your strike, share count, and current valuation and shows the exercise cost and the AMT exposure.

The four questions that actually decide it

Strip away the mechanics and the decision comes down to four honest questions.

Can you afford it? Add the strike-price cost and the estimated tax bill. That’s the real number. If exercising drains your emergency fund right after you’ve lost your income, that alone may answer the question.

Do you believe in the company? Exercising is buying stock in a private company you’re leaving. If you wouldn’t invest that same cash in it as an outside investor today, that’s worth sitting with.

How far away is a liquidity event? Your cash is locked up until the company sells, goes public, or runs a tender offer. That could be years. Could be never.

Can you afford to lose it entirely? This is the one people skip. If you exercise and the company fails, the cash you spent — on shares and on taxes — is gone. Exercising is a bet, and the stake is real money you’re spending on the way out the door.

The ISO-to-NSO cliff

If you decide the options are worth keeping but let the 90 days lapse, you don’t necessarily lose them, but you lose their best tax treatment. On day 91, ISOs become NSOs. Held properly as ISOs (exercised in time and held long enough after), your eventual gain can qualify for long-term capital gains rates. As NSOs, the spread at exercise becomes ordinary income instead. On a large spread, that difference can run into six figures of extra federal tax.

So the 90-day window isn’t only “exercise or lose them.” For valuable grants, it’s often “exercise as an ISO now, or accept a worse tax outcome later.” That’s a reason not to let the deadline pass by default.

What to do next

If you’ve just left or been laid off, the sequence is: find your exact exercise deadline in your paperwork, count the vested shares, and calculate the full cost — strike plus tax — before you decide anything. Don’t let the 90 days run out simply because the math felt overwhelming. And if the numbers are large, this is worth an hour with a tax professional who does equity — the cost of good advice is trivial against the cost of getting AMT wrong.

Start with the numbers. The ISO exercise tax calculator will tell you what exercising would actually cost you, so you’re deciding with facts instead of dread. For the bigger picture on how AMT is hitting option holders this year, see our piece on why AMT risk is rising for ISO holders in 2026.

Frequently asked questions

How long do I have to exercise stock options after leaving?

Typically 90 days after your last day for incentive stock options (ISOs) — this is an IRS rule, not just company policy. Some companies extend the window, but extending past 90 days converts ISOs to NSOs and changes the tax treatment. Check your specific plan and separation agreement.

What does it cost to exercise stock options?

The strike price times the number of options, paid in cash, plus potential tax. For ISOs, exercising can trigger Alternative Minimum Tax on the spread between fair market value and your strike, even though you haven’t sold anything. For NSOs, the spread is taxed as ordinary income at exercise.

Should I exercise my options if I’m getting laid off?

Only if you can afford the full cost (shares plus tax), you believe in the company’s future, and you can afford to lose that money if it fails. The cash is locked up until a liquidity event that may be years away or may never come. Run your numbers before deciding.

What happens if I don’t exercise within 90 days?

Your ISOs either expire or convert to NSOs, depending on your plan. If they convert, you may still be able to exercise them later, but they lose the favorable ISO tax treatment, meaning the spread at exercise is taxed as ordinary income rather than potentially qualifying for long-term capital gains.