Option exercise is the act of paying a fixed strike price to turn vested stock options into company shares you own. Vesting earns the right to exercise; exercise completes the purchase. Until exercise, an option is only a promise of future stock. section 4.2 section 21.4.2
Keep these practical points in mind:
- The strike price is fixed when the option is granted, so a lower strike price makes conversion cheaper if the company becomes more valuable. section 21.4.2
- A typical grant vests over four years with a one-year cliff: nothing vests during the first year, then one quarter vests at the anniversary and the rest vests monthly. section 21.4.2
- Leaving the company can create a short deadline—usually about 90 days—to exercise vested options, or they may disappear. section 4.2 section 21.4.2
- Exercised shares can be sold only if there is a buyer; selling shares held for less than a year may make the profit taxable as income. section 4.2
A grant becomes ownership
Suppose an employee receives options with a strike price of $1 per share. After the first year of a four-year schedule, one quarter of the grant is vested. Exercising that portion means paying $1 for each vested option and receiving the corresponding company shares. The remaining options still require later vesting before they can be exercised. section 21.4.2
