Option exercises create tax bills before any cash arrives. ISO exercise spreads the bargain element (FMV minus strike price) into AMT exposure in the year of exercise, and leaving a company starts the exercise clock. Work the math before signing any separation agreement.
The Mechanics
- ISO (incentive stock options): no income at exercise, no withholding — the bargain element counts toward AMT. Pay AMT on paper gains you have not sold.
- NSO: ordinary income at exercise with withholding. Lower tax risk, worse capital-gains base.
- RSU: income at vesting, taxes withheld in shares. Sale after vesting: capital gains on growth.
The 90-Day Window After Leaving
Most ISO plans give 90 days post-termination to exercise; beyond, options convert to NSO status. Know your plan's window before your last day — see the equity vesting guide for the full exit map. Cash for exercise is the hard part: exercise costs cash + AMT. Plan it as a payment, not a formality.
Early Exercise & 83(b)
Early-exercise grants with 83(b) elections (filed within 30 days of grant, irs.gov) start the capital-gains clock at grant price. The election is a tax strategy, not paperwork; founders and early employees use it deliberately.
Sell vs. Hold After Departure
Holding exercised ISO shares keeps AMT exposure live; selling at below-FMV converts gains into losses you can carry. The tax code has rules for both (irs.gov). Get the numbers on paper before you sign a severance that includes your options.
Put the rule into action
Write the letter with the free Severance Package Negotiation Letter generator. The state pages carry the local payout and notice windows, and the application tracker keeps the follow-up date in writing.
Put the rule into action
The math before you sign anything
Leaving with options turns a paper position into a cash decision. Three numbers decide it: the strike price, the fair market value at exercise, and the spread between them, which is the bargain element.
- Incentive stock options (ISO): no income and no withholding at exercise, but the bargain element counts toward alternative minimum tax in the exercise year. You can owe tax on a gain you have not sold.
- Non-qualified stock options (NSO): ordinary income at exercise, with withholding, and a cleaner but lower capital-gains base.
- RSUs: income at vest, often withheld in shares; growth after vest is capital gain.
Model the exercise as a payment, not as a formality: exercise costs cash plus AMT before any sale proceeds arrive. Get the fair market value used at exercise in writing, and check the alternative minimum tax position before you commit. The equity vesting entry covers the schedule, and the vesting calculator prints your vest dates.
The post-termination window is the real deadline
Most ISO plans allow a limited period after separation to exercise vested options; beyond that window, ISO treatment converts to NSO treatment, which changes the tax answer you were planning around. The window length lives in the plan document, not in your offer letter, and it runs from your separation date.
Three dates belong in one calendar: your last working day, the exercise deadline, and any expiration of unvested awards. Unvested awards usually forfeit at separation, so a vest date just after your last day is money you did not collect. Read post-exit exercise for the mechanics and the records guide for the valuation facts behind your strike price.
Early exercise, 83(b), and holding decisions
Early-exercise provisions with an 83(b) election start the capital-gains clock at grant price; the election has a short filing deadline after grant, and it is a tax strategy with real downside if the value later falls. It is available on restricted stock, and on options only where the plan permits early exercise.
After leaving, holding exercised ISO shares keeps AMT exposure live; selling below the fair market value at exercise converts part of the position into a carryable loss. Both routes have rules, and the decision depends on your year's income, the holding period, and how much cash the exercise consumed.
Numbers and dates to get in writing
- Strike price per grant and the grant dates.
- Fair market value used at exercise, and the valuation date behind it.
- The post-termination exercise window with its deadline date.
- Vested and unvested counts as of your last working day.
- Any acceleration clause triggered by a change of control or an involuntary termination.
If a severance offer mentions equity, settle the equity facts first: an agreement that trades an option position for cash without the window and the spread documented is the most expensive paperwork error in a startup exit. See severance scripts for the ask wording.
Option types and tax at exercise
| Award | Tax at exercise | AMT exposure |
|---|
| ISO | No ordinary income at exercise | Bargain element counts toward AMT |
|---|
| NSO | Ordinary income at exercise | Not an AMT item |
|---|
| RSU | Income at vesting, shares withheld | Not an AMT item |
|---|
| Early exercise with 83(b) | Income recognized at grant | Starts the capital-gains clock at grant |
|---|
Before you rely on a date or an amount on this page, check it against the California job exit rules page and the New York job exit rules page, along with the 401(k) Vesting Schedule definition and the equity tax trails guide hub. Rules move, and those pages carry the current text.
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Frequently Asked Questions
- Do ISO exercises create income?
- No ordinary income at exercise, but the spread between fair market value and strike counts toward alternative minimum tax in the exercise year, so you can owe tax on a gain you have not sold. That is why the exercise must be modeled as cash plus AMT, not as a formality. See the equity vesting entry.
- What happens to my ISOs when I leave?
- Vested options usually remain exercisable for a limited post-termination window set by the plan, commonly measured from your separation date; beyond that window ISO treatment converts to non-qualified treatment. Unvested awards normally forfeit. Ask for the deadline date in writing before your last day and read post-exit exercise.
- Should I exercise before I leave?
- Only with the math on paper: exercise consumes cash and can trigger AMT in the same year you also receive severance income, which raises the tax bill. Compare the spread, the window, and the plan document with the vesting calculator before deciding.
- What is an 83(b) election worth?
- It starts the capital-gains clock at grant price when an early-exercise provision exists, filed within the short deadline after the grant. It is a deliberate strategy with downside if the value later falls, and it is not a paperwork habit. See the records guide for the valuation facts you need first.
The post-termination exercise window and the 83(b) filing deadline are plan and IRS rules, not state law: most ISO plans give a short window after separation, and the election is filed within a short window after grant. Confirm both with the plan administrator and on IRS guidance, and confirm any wage, PTO, or pay-window question that comes with the exit with the state agency named on the state rule pages. Run the vested count in the vesting calculator before you sign a package that touches your options.