If your job offer includes stock options or you’re sitting on some already, you might wonder what they mean. Maybe you’ve heard people talk about them like a golden ticket, but it all feels a bit murky when you look at the paperwork.
You’re not alone. Stock options are a standard compensation in tech, marketing, and SEO roles, especially at startups. But they’re also one of the least understood. This guide breaks it all down in everyday language. No jargon, no assumptions, just real talk about how stock options work, how they compare to RSUs, what taxes to expect, and how to avoid common mistakes.
What Are Stock Options?
A stock option allows you to buy your company’s stock shares at a locked-in price. That price is called the “strike price.” Ideally, the value of the stock goes up over time, and you can buy your shares at the original low price and then sell them for more. That’s the dream.
Say you’re granted 1,000 options at $1 per share. A few years later, the stock is worth $10 per share. You can still buy your shares at $1 and sell them for $10. That’s a $9 gain per share—or $9,000 total.
The idea is that if the company does well, your options could turn into a meaningful payout. But it takes planning (and patience) to get to that point.
What’s the Difference Between Stock Options and RSUs?
Let’s quickly discuss RSUs (restricted stock units). RSUs and stock options are both forms of equity, but they work in different ways.
With RSUs, your company promises to give you actual shares over time. You don’t buy them; they appear in your account once they vest. The downside? As soon as RSUs vest, they count as income. That means you’ll owe taxes immediately based on the shares’ value, even if you don’t sell them.
Stock options don’t come with that kind of automatic tax bill. You’re not given shares; you’re given the right to buy shares later. You only pay taxes when you choose to buy (or “exercise”) your options. That gives you more control over the timing.
How Does Vesting Work?
Most companies don’t hand over all your stock at once. Instead, they set a vesting schedule, spreading your equity over time.
A typical setup is four years with a one-year cliff. That means nothing becomes yours until you’ve been with the company for a year. After that, you usually earn a chunk every month or quarter until you’re fully vested.
Let’s say you’re granted 4,000 options. After one year, you might get access to 1,000 of them. The remaining 3,000 would vest gradually over the next three years.
If you leave before you’re fully vested, you only keep the already vested portion. The rest disappears.
What Does It Mean to “Exercise” Your Options?
When your options vest, you can exercise them, meaning buying the shares at the strike price.
Let’s walk through a basic example.
- You’ve got 10,000 vested options
- Your strike price is $1 per share
- The company’s stock is now worth $5 per share
You’d need to spend 10,000 × $1 = $10,000 to buy all your shares.
But there’s more to it. Because the shares are now worth $5, and you’re buying them for $1, you’re getting a $4 “gain” per share. Even though you haven’t sold the shares, the IRS treats that $4 as income.
That means you have $40,000 of taxable income on paper. You’ll owe income tax on that amount, even if your money is tied up in shares you can’t sell yet.
Now let’s say a year later, the stock price hits $10, and you sell all your shares. You’ll pay capital gains tax on the $5 increase since you exercised. That’s another $50,000 in profit, taxed differently than your regular paycheck.
In total, you’ve:
- Spent $10,000 to buy the shares
- Paid income tax on $40,000
- Paid capital gains tax on $50,000
- Walked away with a solid profit, but definitely less than the whole $90,000 difference between your strike price and the final sale price
3 Easy-to-Miss Stock Option Mistakes
It’s easy to get tripped up by stock options if you haven’t dealt with them. Here are three common mistakes that people make that you can avoid.
- Assuming that options = guaranteed money. They don’t. If the company doesn’t succeed or never goes public, your shares might never be worth anything.
- Confusing the number of shares with the value. Just because you have 20,000 options doesn’t mean you’re sitting on $20,000. It depends on the strike price, current value, and whether there’s even a way to sell.
- Getting caught off guard by taxes can be surprising. Purchasing your shares doesn’t only require the strike price; it can also lead to a significant tax bill if the value has increased. If you’re unable to sell your shares yet, you could owe money you don’t have in cash.
Should You Exercise Now or Wait?
This is where things get personal. There’s no one correct answer, but here are some things to consider.
You might want to exercise early if the stock price is still close to your strike price. Your tax bill will be lower because the “gain” is small. If you qualify, you could even file an 83(b) election, which lets you pay taxes now and avoid bigger ones later.
But buying early means you’re spending your own money, sometimes thousands of dollars, for shares you can’t sell yet. If the company fails or never exits, that money could be gone.
On the flip side, waiting to exercise means you’ll pay more in taxes later if the stock price rises. But you’ll have more certainty about the company’s future and more time to decide if it’s worth it.
If your company offers buybacks or participates in secondary markets, that can give you an earlier chance to sell. But not every company does.
What Happens If You Leave the Company?
This part trips up a lot of people.
When you leave your job, your stock options don’t stick around forever. Most companies give you 90 days to exercise any vested options. If you don’t act in time, they disappear.
Let’s say you’ve worked for three years and have 3,000 vested options. You quit, and now the clock starts ticking. You have three months to decide: do you spend the money to buy them, or let them go?
It’s not an easy decision, especially if it will cost thousands and you’re not sure what the future holds.
Some companies are more generous and allow a longer post-termination window—sometimes up to a year or more. But it’s not standard, and you usually have to negotiate for it.
If you’re accepting a job with stock options, it’s worth asking: What happens if I leave? Can we extend the exercise window after a year or two of employment?
Good Questions to Ask About Your Equity
To get a better handle on your options package, start with these:
- What’s the strike price?
- What’s the current value of the shares?
- What’s the vesting schedule?
- Are early exercises allowed?
- Can I file an 83(b) election?
- What’s the window for exercising after I leave?
- Is there a plan to go public or offer share buybacks?
Asking these upfront can help you avoid stress and financial surprises down the line.
The Bottom Line
Stock options can be an amazing benefit, but only if you understand how they work. They’re not guaranteed payouts, and they’re definitely not free money. Think of them as a chance to invest in your company. Just like any other investment, you’re taking the risk and reward attached to the company.
If you’re not sure what to do, don’t guess. Talk to your HR team, a financial advisor, or even coworkers who’ve gone through the process before. And remember: there’s no shame in not knowing—this stuff isn’t taught in school, but it can be learned.
Do you have stock options but don’t know where to start? Start by asking: What would it cost me to buy these shares today—and can I sell them if I do?
That one question can save you from confusion and regret later.
