Read This Before You Accept Stock Options
Recently, I missed the window to exercise options from a company I advised. The CEO changed, I slipped off the radar, and by the time I checked, the 90-day window was over. Which got me thinking, I should write about stock options!
It’s exciting to get stock options because it feels like ownership. But I’ve noticed most people don’t really understand what they’re getting, and the way the system works means they rarely see a payout.
I wanted to share how options actually work, why the system exists, and why it so often leaves employees and advisors with nothing. I’ll also share a story from my last company and examples of companies that are trying to change this.
What stock options really are
Stock options aren’t shares. They’re the right to buy them later at a set “strike price.” You earn the right to buy through vesting, usually over four years. Then, if you leave the company for any reason, you face a decision: exercise the options (aka pay for them) or walk away and forfeit them.
The industry standard for this “post-termination exercise period” (PTEP) is 90 days. In fact, 82% of startups have a median window of 89-92 days. That means you have three months after leaving to decide what to do. Exercising often requires a large upfront payment and may also create a tax bill, all for stock that isn’t yet liquid.
Why startups use stock options in the first place
This structure wasn’t designed to trick employees. It came out of tax law, accounting rules, and the way venture-backed companies are built.
If a company gave employees stock outright, it would be taxed as income immediately. Stock options defer that tax until exercise, and if held long enough, profits may qualify for capital gains tax treatment, which is more favorable.
Most founders simply do what our lawyers recommend. And lawyers generally recommend following industry standards, which haven’t changed because this setup is advantageous to companies.
Most employees don’t exercise their options when they leave, which means those shares recycle back into the pool. Companies then use that equity to hire replacements or offer more options to employees who stay, without expanding the pool or diluting existing shareholders.
This is great for employees who come in early and stay through the exit, since they can use the proceeds from selling shares to cover the cost of exercising and any taxes that come with it. It’s not great for folks who leave along the way.
What percent of employees exercise their options?
A Carta analysis of startup equity data shows just how common it is for employees to lose their vested options.
In 2025, over 70% of vested options were not exercised when employees left their companies, whether due to layoffs or voluntary departures. That means most of those earned shares went right back into company option pools.
It appears to ebb and flow with the market. During the bull market of 2021, optimism was high, and fewer people walked away from their equity; the rate dipped to around 42% (meaning 48% exercised). But as markets cooled, layoffs rose, and valuations reset, that figure has climbed up again.
Why do employees only have 90 days to exercise their stock options?!
One of the most seemingly random parts of stock options is the 90-day post-termination exercise window. If you’re an employee who leaves a company or an advisor whose agreement comes to an end, you usually have these three months to decide whether to exercise your vested options. If you don’t, you lose them.
Where did this come from? Again, it’s the result of U.S. tax law. For an option to qualify as an Incentive Stock Option (ISO) — which gives employees more favorable tax treatment — the IRS requires that it be exercised within 90 days of leaving employment. After that window, it converts to Non-Qualified Stock Option (NSO), which means the gain at exercise is taxed as ordinary income.
Most stock agreements also make clear that the company isn’t required to remind you when the clock starts ticking. So you miss it, that’s on you.
Why stock options actually suck for employees
I’ve seen stock options play out a few ways:
Joon leaves the company and can’t afford to exercise their options.
Andy doesn’t have enough visibility into the value of the company or cap table to make a confident decision.
Halle was unaware of the PTEP, and the options expire (hi, it me 👋).
Fatima pays to exercise their options, but the company tanks. Their options are worthless.
Occasionally, an employee chooses not to exercise their options that would have been worth something. This happened at my last company, Natalist. One employee left a year before we sold and chose not to exercise their options (which would have been a few thousand dollars). When the company was acquired, those options would have been worth nearly $1 million.
That case is very unusual. Far more common are the cases of Joon, Andy, Halle, and Fatima.
(Names have all been changed, except mine.)
Unfortunately, it’s unlikely to change
So why don't companies just extend the 90-day window? A few companies have done this. Quora, Pinterest, and Coinbase, for example. I’ve even heard of companies that tie the exercise window to the tenure (so the longer you stay, the longer the window). That feels more fair, right?
The reason more companies are unlikely to extend the 90-day PTEP is that it doesn’t make economic sense for them. Some point out that longer exercise windows create “dead equity.” If former employees can hold onto their options for years (because, you know, they earned them), those shares don’t recycle back into the option pool. To keep hiring and rewarding current employees, the company has to issue more and more shares — diluting everyone else. The estimated impact could be as high as 80% more dilution for people still at the company.
Extending the window also doesn't eliminate the underlying tax issue. To qualify for their preferential tax treatment, Incentive Stock Options (ISOs) must be exercised within 90 days of leaving a company (with special exceptions for disability or death). If exercised after this 90-day period, the option automatically loses its ISO status and is reclassified as a Non-Qualified Stock Option (NSO) for tax purposes.
This reclassification has real tax implications for the employee:
At exercise: The difference between the stock's fair market value and the strike price (the "spread") is immediately taxed as ordinary income. For a former employee, this means they owe taxes on a paper gain without having sold any shares to cover the tax bill.
At exit: Any subsequent change in the stock's value after the exercise date is treated as a capital gain or loss.
So while a longer window provides more time to make a decision, it doesn’t remove the risk of being stuck with a tax bill before ever seeing a dollar back (unless, of course, the company has an exit during the window).
The best solution would be for the IRS to stop taxing illiquid private stock until it’s actually sold.
Final thoughts
Startup employees are expected to take two gambles. The first gamble is when they join and accept a lower salary in exchange for stock options that might be worth a lot if the company succeeds. The second gamble comes when they leave and are asked to send the company a check for thousands of dollars within 90 days to hold onto what they’ve already earned.
Stock options are supposed to align incentives and reward the people who take a chance on early companies. In practice, they often do the opposite. They create the illusion of ownership, but most employees never actually benefit.
So where do we point the finger? I guess we can start with the tax code, which states that ISOs must be exercised within 90 days of leaving a company. This is then reinforced because the people distributing said stock options have a fiduciary duty to shareholders as a whole—not to any particular employee—and short windows benefit the remaining shareholders. Add private-market illiquidity, and you get a system that works fine for cap tables and poorly for many people holding options.
Founders didn’t set out to design an unfair system. I certainly didn’t. I followed the defaults because that’s how it’s usually done. A few companies have pushed for longer windows or tenure-based windows, which may be better. But the bigger fix likely sits with policy—like not taxing illiquid private stock until it’s sold. Until then, this will remain a tough trade-off. For a small number of people, options will be life-changing. For most, they won’t.
