When Should I Exercise My Non-Qualified Stock Options (NSOs)?

Non-Qualified Stock Options (NSOs) are a common form of equity compensation, especially in tech and high-growth companies. But despite their potential value, they’re often misunderstood — and mismanaged.

In this week’s post, I’ll break down what NSOs are, how they work, how they’re taxed, and most importantly — how to think strategically about when to exercise them.

What Are NSOs?

NSOs give you the right to purchase a set number of company shares at a fixed price (called the strike price) within a certain timeframe, typically up to 10 years from the date they’re granted.

They also follow a vesting schedule, meaning you only gain the right to exercise them gradually over time. ²

Your option grant will include:

• Strike Price – The fixed price you’ll pay to buy each share.

• Expiration Date – Typically 10 years from the grant date¹.

• Vesting Schedule – Defines when you’re allowed to exercise your options.

If you’re unsure whether you have NSOs (vs. ISOs), check your option grant agreement. It’s usually provided when you’re hired or receive a new grant.

How Are NSOs Taxed?

Here’s the critical piece: NSOs are taxable when you exercise them, not when they’re granted or when they vest.

• No tax at grant

• No tax at vesting

• Tax due at exercise — on the bargain element (the difference between the fair market value (FMV) and your strike price)

That bargain element is taxed as ordinary income, and your company will likely withhold taxes at the time of exercise.

Example:

You have 10,000 NSOs with a $5 strike price. The FMV is now $15.

• You exercise them: (10,000 shares) × ($15 – $5) = $100,000 of ordinary income

• You owe income taxes on that $100,000, even if you don’t sell the shares yet.

Later, if you sell the stock and it’s gone up to $20, you’ll owe capital gains tax on the $5 gain per share.

So… When Should You Consider Exercising?

That depends on a variety of factors.  But here are some of the different factors that can help shape the way you think about this question:

Exercising Early to Minimize Taxes

If the FMV is close to your strike price, the bargain element — and your tax bill — will be smaller. This works well if:

• The company is still early stage or just getting traction

• You believe in the company’s long-term growth

• You’re okay with some illiquidity and risk

Start the Capital Gains Clock

Once you exercise, the clock starts on long-term capital gains treatment. If you hold the shares for more than one year after exercising and later sell them, any gain is taxed at the lower long-term capital gains rate.

This can significantly reduce your tax bill compared to ordinary income tax.

But Be Aware of Risks

• If the stock drops after you exercise, you could be stuck with a paper loss and no ability to recover the taxes you already paid.

• You also need cash upfront — to exercise the shares and cover the tax liability.

• If the company is private, you may not be able to sell for years — so your cash is tied up indefinitely.

Public Company? Consider Same-Day Sale

If your company is publicly traded, you may be able to do a cashless exercise (buy and sell all at once), or a sell-to-cover (sell enough shares to cover taxes and hold the rest). These strategies can help reduce risk and cash outlay.

Other Factors to Consider

Beyond tax timing and share price, here are some strategic factors to weigh:

Liquidity Needs

Do you have the cash to cover the exercise cost and the tax bill? Or will doing so prevent you from funding other priorities like buying a home or building an emergency fund?

Concentration Risk

If your company stock already represents a large portion of your net worth, you’re vulnerable. If the company underperforms, you could see a double hit: your income and your portfolio both drop.

Employment Timeline

If you’re considering leaving the company, keep in mind that most NSOs typically have a post-termination exercise window where shares will expire after your departure. While it can be up to 90 days, the window will vary by employer. You’ll need to act quickly — or lose the option to exercise entirely.

Company Status: Private vs. Public

• Public companies offer more flexibility, including a clear market to sell your shares.

• Private companies carry more uncertainty. You could be sitting on illiquid stock for years with no guaranteed exit.

Life Goals & Cash Flow

Are there major life events on the horizon — like a wedding, kids, business launch, or relocation? These can all affect how much risk you’re willing (or able) to take on.

Wrapping It All Up

NSOs can be a powerful wealth-building tool — but only if managed with intention. Here’s a quick decision-making framework:

• Review your grant agreement: Know your strike price, expiration date, and vesting terms.

• Estimate your tax impact at exercise based on the bargain element.

• Weigh your risk tolerance, cash flow, and other financial goals.

• Decide if you want to minimize taxes, reduce risk, or maximize upside potential.

In many cases, early exercise can reduce tax exposure and start the clock toward long-term capital gains — but it comes with risk and complexity. There’s no one-size-fits-all answer.

If your stock options are a meaningful part of your compensation or net worth, it’s worth getting a second opinion. Work with a financial advisor and accountant to weigh the tax tradeoffs, cash flow impact, and determine how this fits into your broader financial plan.

Your NSOs are an opportunity. Let’s make sure you use them wisely.

¹ Expiration timeframe will vary based on the company and how long you’ve worked there.

² The vesting schedule is determined by the employer and outlined in the stock option agreement.

This blog post is for general information only and should not be construed as personalized financial or tax advice. Please consult with a financial advisor and/or qualified tax professional regarding your individual situation.

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