Employee Stock Options Guide: ISOs, NSOs, RSUs & When to Exercise
Equity compensation is among the most complex elements of a compensation package and the most misunderstood. A senior engineer at a Series B startup who doesn't understand their options grant — including the exercise price, expiration date, and post-termination exercise window — may leave tens of thousands of dollars on the table when they change jobs.
Key Statistics
- 30-day post-termination exercise window is the standard; 90 days is common; only 5–10% of startups offer windows longer than 1 year (Carta data)
- Average startup equity dilution from Series A to IPO: 60–70% of common shareholder percentage (First Round Capital research)
- ISO holders who meet holding period requirements pay 15–20% long-term capital gains tax vs. 22–37% ordinary income tax for NSO holders
- Only 38% of startup employees understand their equity grant terms according to Carta's 2023 equity survey
- The median equity grant for a Series B software engineer is 0.08–0.15% of the company (Carta Equity Benchmarks, 2023)
ISOs vs NSOs: the key difference
Incentive Stock Options (ISOs) have preferential tax treatment: you pay no ordinary income tax when you exercise, and if you hold the shares long enough (2 years from grant, 1 year from exercise), gains are taxed at long-term capital gains rates. Non-Qualified Stock Options (NSOs) are simpler: the spread between exercise price and fair market value at exercise is taxed as ordinary income. ISOs are only available to employees; NSOs can be granted to consultants and board members.
RSUs: the simpler structure
Restricted Stock Units don't require you to purchase anything — they're a grant of actual company stock that vests over time. When RSUs vest at a public company, the shares are delivered and you owe ordinary income tax on the fair market value at vesting, which most companies cover through "sell-to-cover" (automatically selling some shares to pay the withholding). RSUs have zero risk of being underwater (unlike options) but also zero optionality upside.
The post-termination exercise window
This is the single most overlooked element of startup option grants. Most standard option agreements give you 90 days after leaving the company to exercise your vested options — after which they expire worthless. If the exercise price plus taxes would cost $50,000 and you don't have that capital available, you lose the options. Some companies (Stripe, Coinbase historically) extend this window to 5–10 years — ask explicitly about this before accepting an offer.
When to exercise startup options
83(b) election allows you to pay taxes on the fair market value of options at grant (before they vest) — potentially at a very low valuation. This makes sense when the current FMV is near your exercise price (low tax cost) and you have conviction the company will grow significantly. Consult a CPA before exercising any option grant over $5,000 in value — the Alternative Minimum Tax (AMT) applies to ISO exercises and creates significant complexity.