This page is for someone comparing a startup offer with other compensation or deciding what to do with options already granted. For the tax mechanics, also read Taxes on RSUs, ISOs, NSOs, and Restricted Stock.
This is general education, not individualized investment, tax, or legal advice. The answer depends on the option plan, grant documents, tax situation, state, company, and dates involved.
Understanding the grant
An incentive stock option is not a share of stock and it is not cash compensation. It is the right to buy a stated number of common shares at the strike price before the option expires.
Four terms belong at the top of your notes:
- Share count: how many shares the grant allows you to buy
- Strike price: what you must pay for each share
- Vesting: when the option becomes yours to exercise
- Expiration and termination terms: how long the option lasts, including what happens after you leave the company
The amount by which the common-share value exceeds the strike price is the option’s intrinsic value. An option can also have value because the shares might rise before it expires, even if it has no intrinsic value today. Employee-option restrictions make that value harder to realize: you may still need cash to exercise and a buyer for the shares. The Options Industry Council explains intrinsic and time value for traded options; employee grants have additional restrictions.
Common stock is not preferred stock
Recruiting conversations often mention the preferred-share price from the latest financing. Employees generally receive options on common shares.
The distinction matters. Preferred investors may have liquidation preferences: rights to receive sale proceeds before common shareholders. Other terms can also affect how much each class receives. A high preferred price does not establish that an employee’s common shares have the same value.
Ask for the current 409A valuation, an estimate of common-share value used for tax purposes. Compare it with the strike price to understand the current spread. It does not establish a price at which you can sell the shares.
A deliberately optimistic example
Suppose a grant contains:
- 10,000 options
- a $1 strike price
- four-year vesting
- a $10 preferred-share price in the latest financing
It is tempting to call the grant worth $90,000: 10,000 multiplied by the difference between $10 and $1. That calculation uses the preferred-share price in place of the common-share value and leaves out vesting, taxes, and sale restrictions. It already subtracts the $10,000 exercise price, but you would still need that cash to exercise the full grant.
If the common stock’s current 409A value is $3, the spread is $2 per option, not $9. After two years, perhaps only half the grant is vested. Exercising those 5,000 options would require $5,000 plus any tax cost, in exchange for private shares that may not be saleable.
The favorable story can still happen. The company may grow, go public, and make the options valuable. The point is to compare an offer using the risks and restrictions that exist today, not only the outcome in the recruiting presentation.
What has to go right
For a startup option to produce substantial spendable value:
- the common stock must rise meaningfully above the strike price
- enough of the grant must vest before you leave
- the exercise window must give you a practical chance to buy the shares
- you must be able to afford the exercise and any resulting tax
- the company must eventually provide liquidity through a sale, tender offer, or public market
- common shareholders must receive value after any preferred claims are satisfied
A down round, an acquisition at a disappointing price, dilution, or no liquidity event can produce a much smaller result. The option may expire with no value.
Questions to ask before accepting the offer
- What is the current 409A value of the common stock, and when was it established?
- What percentage of the fully diluted company does the grant represent, counting shares that could be issued through outstanding options, convertible securities, and other rights?
- What are the vesting schedule and expiration date?
- What happens to vested options if employment ends?
- Does the company permit early exercise, and under what terms?
- Has the company offered tender sales or other employee liquidity?
- What can the company disclose about preferred-share liquidation rights?
- How much unvested compensation and benefits would you give up by leaving your current job?
Before exercising
Plan ahead when employment is ending, an initial public offering (IPO) or acquisition appears possible, or exercising would require substantial cash. The spread on an ISO exercise can also affect alternative minimum tax (AMT).
Read the actual plan and grant. Calculate the exercise cost, estimated tax, concentration in the employer, and amount you can lose without damaging the rest of your finances. A short exercise deadline is not enough time to reconstruct those facts from memory.
Sources and review
Reviewed September 7, 2026. For federal option-tax treatment, see IRS Topic 427 and Publication 525. The grant documents remain the source for your rights and deadlines.