Exercise

The act of using stock options to buy shares at the strike price. After exercise, the option holder becomes an actual shareholder. Exercising usually requires paying cash and may trigger tax obligations.

Why it matters

Exercising is how you turn stock options into actual ownership. The decision of when to exercise has major financial and tax implications. Timing it right can save you significant money, while waiting too long can make exercise prohibitively expensive.

How it works

When you exercise stock options, you pay the strike price per share to purchase the shares. If your strike price is $0.50 and you have 10,000 vested options, exercising costs $5,000. For ISOs, early exercise (before the company value increases) combined with an 83(b) election can provide significant tax advantages. The spread between your strike price and fair market value at exercise may trigger alternative minimum tax (AMT) for ISOs, or ordinary income tax for NSOs. Many employees wait to exercise until a liquidity event is near, but this can mean a much larger tax bill.

Learn more

• ISOs for Startup Employees
• 83(b) Elections Explained

Related terms

• Stock Options
• Strike Price
• Fair Market Value
• 83(b) Election