Several friends have now quit or been laid off from their jobs at startups and have asked me what to do with their options.

Not exercising could mean millions left on the table, exercising could mean liquidating a huge chunk of cash that could go to 0.

Here are my thoughts:
Disclaimer: I partnered with my friends at @compound to help with this thread.

I didn’t have all the answers and appreciate @jrdngonen spending the time to get this out to Twitter. Also I am required to say that THIS IS NOT FINANCIAL ADVICE (but ping them with questions).
Let’s start with the basics:
- Early stage startups grant you stock options as part of your compensation package because they are poor and can’t pay you cash
- Stock options give you the right to purchase company stock at a predetermined fixed price known as the strike price
2/ You like options, because if the startup has a big liquidity event (Coinbase, Figma, Slack, soon to be Stripe, etc, etc.) your options actually turn into money. And money is great.

Millions of dollars is even better
3/ The problem is that the most likely outcome is the shares go to $0 and if you join late, it costs a ton to exercise options.

E.g. you joined Coinbase at the Series C, you're granted 50k options at ~$2.76 strike price == ~$138k to exercise (not including tax obligations!)
Another fun issue – if you wait too long to exercise, and the price per share increases in that time, you could actually owe tens or hundreds of thousands of dollars in taxes on top of the exercising.

The IRS is great
4/ So because the math is tricky and expensive, the most common scenario is that most startup employees do not exercise their shares. Waiting is fine too, so long as you are at the company at the time of exit.

But, you’re put in a difficult situation if you get laid off or quit.
5/ Ok, so now, what do you do when you’re either laid off or quit and have a bunch of vested, unexercised options?

Step 1: Find out what your post-termination exercise window is.
This is the amount of time you have between your final day at the company and your final day to exercise your vested shares before they are terminated and RETURNED to the company.

That’s possibly years of hard work in the form of stock options down the drain.
Step 2:
If your company has a short post termination exercise window (30 days to 12 months), you need to make a decision.

If the exercise window is longer (>12 months) you’re ok to just hang out and hope there is a liquidity event before the time is up (but taxes may increase)
Step 3:
Determine how much it’s going to cost you to exercise your shares. You do this by:

Taking the number of vested, unexercised options you own * strike price.

Then, you need to go ask your CFO or HR team for the latest 409A.
If the stock price has increased between the time you got your options and now, you’re likely going to end up owing a tax on top of the exercise amount.

The lovely IRS considers this a gain and thus taxes you. Ask an accountant (or @compound)
Step 4:
Now that you know how much it’ll cost to exercise your shares after leaving, you need to determine if it’s worth it.
-How far along is the company?
-Are they doing well?
-What do you think the odds are that they will raise more money?
Your job is to understand the relative risk to cash you have to gamble with.

If you can stomach the costs and are bullish, this can be a no brainer. You’re betting on the company.
If you can’t cover the costs but are bullish, you’ll need to consider a loan for exercising your options (in my experience this is ~15% APR) or only exercise some options
If you think the company is a dud or is going to lose significant enterprise value by the time there is a liquidity event, you can just simply walk away (it still sucks but is better than losing money).
Other paths:
You still have other options you can try before just shelling over cash to exercise.

You could (1) try to negotiate with HR to extend the post termination exercise window and (2) negotiate with your old team to gift or buy the shares as part of your severance
You could also try to sell secondaries at a steep discount and exercise at the time of sale.

It usually takes a solid bit of time to sell secondaries, but if you work for a hot company there may be quick options with outside investors.
I don’t know what tweet number I'm on now, but I also tell friends that they should always, always ask what the exercise window is *before* joining the next company.

You may not walk away from an offer but it'll help inform you so you don’t end up in situations like the above.
And in the next role, you should ask to exercise early and how much it'll cost to do so, because you may be able to do this early and cheaply.

These decisions seem trivial but I have seen friends walk away/lose hundreds of thousands of $ because they didn’t think about this.
Thanks to @compound for helping me put this together and not sound like a total idiot.

If you have more questions I highly recommend reaching out to experts there (I am not an expert!)
@Compound Also, there is no plug at the end of this thread. Do not follow me for more startup advice or threads. This is a rare moment, like a solar eclipse

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