How-to
How to run a stock option exercise
What happens when options are exercised
An option exercise converts a vested option into actual shares by paying the strike price. The number of vested shares, the strike, and the instrument type determine the cost and the tax. ISOs, NSOs, and RSUs each behave differently, from the AMT exposure on ISOs to ordinary-income withholding on NSOs and RSUs, so the exercise process has to branch on instrument type.
Exercise cost
Cost = Shares exercised × Strike price
Separate from tax. The spread, (fair value − strike) × shares, is what drives the tax treatment, and how that spread is taxed depends on whether the option is an ISO or an NSO.
ISO vs NSO vs RSU tax treatment
| Instrument | At exercise | Watch for |
|---|---|---|
| ISO | No ordinary tax; spread is an AMT item | AMT exposure; holding period for cap gains |
| NSO | Ordinary income on the spread | Payroll withholding due at exercise |
| RSU | Ordinary income at settlement | Shares often withheld to cover tax |
A worked example
- 1.Confirm the number of vested shares available to exercise.
- 2.Calculate the exercise cost as shares times strike.
- 3.Determine tax treatment by instrument type and current fair value.
- 4.Collect payment and any required withholding.
- 5.Record the exercised shares on the cap table and update the pool.
How Fintra runs an exercise
Fintra processes exercises straight off the cap table: it confirms vested shares from the vesting schedule, computes the cost and the spread against the current 409A fair value, branches the tax treatment by ISO, NSO, or RSU, and records the resulting shares: updating the pool and the ownership summary. The same fair-value input that drives ASC 718 expense drives the exercise, so nothing is double-entered.
- Vested-share confirmation straight from the vesting schedule
- Cost and spread computed against the current 409A fair value
- Tax treatment branched by ISO, NSO, and RSU
- Automatic cap-table and pool update on exercise
Questions people ask
What is the difference between ISO and NSO tax treatment?
Exercising an ISO triggers no ordinary income tax, but the spread is an AMT preference item. Exercising an NSO triggers ordinary income tax on the spread, with payroll withholding due at exercise. Holding periods then govern capital-gains treatment on sale.
What is the AMT trap with ISOs?
When you exercise ISOs and hold the shares, the spread between fair value and strike counts toward alternative minimum tax even though you have not sold. Employees can owe AMT on paper gains, so it should be flagged before exercise.
How much does it cost to exercise options?
The cash cost is the number of shares exercised times the strike price. Tax is separate and depends on the spread and the instrument type. Model both before exercising, especially for large in-the-money grants.
What is early exercise and an 83(b) election?
Early exercise lets an employee exercise unvested options, and an 83(b) election taxes the spread at exercise rather than as it vests. It can reduce future tax when the spread is small, but it carries risk if the shares lose value.
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Process exercises without tax surprises
Vested shares, spread, and cap table in one step.