Exercise
The act of paying the strike price to convert your stock options into actual shares.
Definition
Exercising your stock options means paying the strike price to buy the shares. You can typically only exercise vested options. There are several exercise strategies: exercise and hold (buy and keep), same-day sale (exercise and immediately sell at a public company), and early exercise (exercise unvested options before they vest, if allowed). Each has different tax implications.
Why it matters
Deciding when to exercise is one of the most consequential financial decisions for startup employees. Exercise too early and you risk losing money if the company fails. Wait too long and you may face a huge tax bill or miss the post-termination exercise window.
Example
You have 10,000 vested ISOs at a $2 strike. The 409A is now $8. Exercising costs $20,000 out of pocket and triggers an AMT adjustment on the $60,000 spread. You now own shares that are worth $80,000 on paper.