How do employee stock options work?

A stock option is the right to buy company shares at a fixed price later. Simple idea, lots of moving parts. Here's the whole journey — grant, vest, exercise, sell — and the two decisions that matter most.

The journey, in five steps

Grant. You're given options over a number of shares at a fixed strike price (the price to buy later).
Vesting. You earn them over time — typically a 1-year cliff then monthly over four years. Unvested options aren't yours yet. See vesting.
Exercise. You pay the strike to turn vested options into actual shares. This can cost real money (and tax). See the exercise & AMT calculator.
Hold. You now own shares — still private and illiquid until a sale, tender or exit.
Sell. At a liquidity event (IPO, acquisition, tender or approved secondary), you can realise the value.

ISOs vs NSOs — the one distinction that changes everything

Your options are either ISOs (incentive, employees only, potentially better tax but can trigger AMT) or NSOs (non-qualified, taxed as ordinary income on exercise). Which you hold drives the entire tax picture — the full comparison is in ISO vs NSO.

The two decisions that matter

When to exercise. Early can start the clock for better tax but risks cash in an illiquid company; late is safer but may cost more tax. See exercise now or wait.
What happens if you leave. A post-termination window (often ~90 days) forces a fast decision — exercise or lose vested options. See leaving & your options.

Before any of it, read the terms: how to read your option agreement.

Frequently asked questions

How do employee stock options work, simply?

You're granted the right to buy a set number of company shares at a fixed 'strike' price. You earn (vest) that right over time. Once vested, you can 'exercise' — pay the strike to get actual shares. You hold them until a liquidity event (IPO, acquisition, tender), when you can sell. The gap between the strike and the share's value is your potential gain.

What's the difference between ISOs and NSOs?

ISOs (incentive stock options) are for employees and can get better tax treatment, but exercising them can trigger the alternative minimum tax (AMT). NSOs (non-qualified) can go to anyone and are taxed as ordinary income on exercise. Which type you hold changes your whole tax picture — check your grant agreement.

Do I have to pay to exercise stock options?

Yes — you pay the strike price per share to convert options into shares, and depending on the type there can be tax on top (AMT for ISOs, ordinary income for NSOs). That combined cost can be substantial, which is why many people model it before exercising and why financing or sell-to-cover options exist.

What happens to my options when I leave?

Vested options are usually yours to exercise, but only within a post-termination window — commonly around 90 days — after which they expire. Unvested options are normally forfeited. Some companies offer extended windows. Check your agreement before you resign; the deadline forces a fast, costly decision.

Get the numbers before you decide

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