Dear SaaStr: Should I exercise my stock company stock options if they are $7 underwater?

Stock options can be really unfair to employees by their nature. Almost no one has the facts to actually know what to do what them. And fewer still even have the financial background to know what to do with the facts even if they have them.

I don’t even know what to do with stock options I have myself from many companies. Even if you are in the money — a good sign — the taxes can be so high on exercise in some cases, it can hardly seem worth it.

But you can look for certain signals. If the company has just done a big “up” round, that’s generally a good sign (faux unicorns of 2021 aside). And if the options are underwater, like here — that’s a pretty bad sign.

So here’s my general rule:

  • If the exercise price AND taxes upon exercise are dirt cheap, and the company has any good momentum behind it, even just a smidge — almost always exercise.  Especially if the cash is fairly small to exercise.
  • But if the company has stalled out, and/or the exercise price + immediate taxes are high — be very cautious. The taxes and exercise price you are paying are real, and any liquidity is likely far off, at best.

That’s probably what your gut says, too.  If things are going well or even just OK, and the exercise price is cheap, buy your options.  If it’s a lot of cash and the company isn’t a rocketship, don’t buy.  And in the middle … really, really think about it first.

Stock options have changed over time. The reality is with taxes where they are today in many cases, stock options even with a very low strike price often only work if you are still an employee at the time there is liquidity.

A related post here:

There Are Never Enough Stock Options To Go Around


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