Underwater options after a layoff: what to do when your strike is above the current value

You’ve been laid off, you have vested options, and the exercise window is closing — but the current share price is below your strike. Should you exercise at all? Usually not. Here’s how to think it through calmly.

Being laid off with a ticking exercise clock is stressful enough. Discovering your options are “underwater” — your strike price is higher than the company’s current fair value (409A) — adds a horrible twist: the thing you’re rushing to save may not be worth saving. The good news is the maths is usually clarifying.

What “underwater” means, and why it happens

Your option lets you buy shares at your strike price. If the current value per share (the latest 409A) is below that strike, exercising means paying more for the shares than they’re currently worth. It usually happens after a down round (the company raised at a lower valuation) or a general decline — common in tougher markets.

Should you exercise underwater options? Usually no.

If the strike is above the current value, exercising today locks in a paper loss and ties up cash in an uncertain, illiquid asset. In most cases the rational move is not to exercise — you’d be voluntarily overpaying. There are narrow exceptions:

• Strong conviction in a big recovery. If you genuinely believe the company will far exceed the down-round price, exercising cheap-ish now (and starting the capital-gains / QSBS clock) can pay off — but that’s a real bet with real cash.
• You’re close to the strike and believe in the trajectory. A small gap plus real upside can justify it.

ISO vs NSO, briefly

When a strike is at or above fair value there’s typically little or no AMT concern for ISOs (the bargain element is zero or negative), and little ordinary income for NSOs — because there’s no spread. So the tax argument for “exercise early to save tax” largely disappears when you’re underwater; it’s mostly a pure conviction bet on recovery.

What to check before you decide

• Your strike vs the latest 409A — the actual gap.
• Your exercise-window deadline (often ~90 days after leaving).
• Whether you truly believe in a recovery above your strike — be honest.
• Whether letting them expire is, in fact, the sensible, no-cost outcome here.

It’s counter-intuitive, but letting underwater options lapse is often the right, disciplined choice — not a failure. Don’t throw good money after a strike price the market has already moved past.

Read next

• The real cost of exercising your options
• Can an ex-employee sell startup shares?
• How much are my startup shares worth?

Further reading

General, independent references on how private-company shares and options work. We're not affiliated with any of them.

• Carta — cap tables, secondaries and valuation explainers
• Cooley GO — startup legal explainers, including rights of first refusal
• Forge Global and EquityZen — secondary marketplaces (larger, later-stage deals)
• Ledgy and Index Ventures OptionPlan — European equity & ESOP references

General information only — not financial, tax or legal advice. Every situation is different; check your own share and option agreements and take professional advice before selling. PrivateTechShares makes introductions only: it is not a broker, does not hold funds, and does not execute or advise on transactions.