Working for a Startup: How Well Do You Know Your Employee Stock Options?
They're potentially lucrative, but also complicated and definitely not a sure thing. Get the right advice before you make any moves.

Imagine you’ve been recruited to get in on the ground floor at a successful startup company. Instead of getting a big paycheck, a large portion of your compensation will come in the form of stock options. It’s one way to reward you for the time you’re willing to put in to help build the company. You’re essentially contributing your sweat equity and betting that your company’s future is bright and that you’ll go along for ride.
Maybe you believe there could be an IPO sometime down the road. An initial public offering is a one-time event that could instantly turn you into a millionaire. But it’s also likely you’ll join the company and then wait several years before the company decides to go public — if ever. That’s because more fast-growing private companies are choosing to stay private. Since the financial crisis, a typical startup waits an average of 10 years before going public, according to a 2018 Stanford University report.
At the same time, some of those private companies are becoming extremely valuable — more than 200 private companies worldwide are now valued at more than $1 billion.

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If the company you work for does well, you could be sitting on some very valuable stock options. But how do you turn those prized options into precious cash right now?
Since private shares aren’t bought and sold on the public stock market, some private companies are helping their employees sell some of those vested options, either by buying back some shares themselves or arranging a partial-share sale companywide in a company-sponsored transaction. There are also a growing number of online marketplaces that have lenders and buyers lined up for individuals who wish to exercise some of their options and then sell the underlying shares.
The longer the company has been in business, the more likely you may be able to cash in. The key is to first understand exactly what you own, and then find out which, if any, of these arrangements your employer may be able to support in order to cash in some of your stock awards.
Stock options are your new best friend – get to know them intimately
Even though stock options may be the most attractive benefit of working for the startup, they’re probably the area you know the least about. That’s not surprising — stock options are incredibly varied and complicated, especially when the company is still private. Your employer probably wants to help but isn’t in a position to give you personalized investment or tax advice. Only a financial adviser who specializes in private-company stock options can let you know about all of your choices — and the tax ramifications — before you take action. There are very few financial advisers who have this specialized expertise, and many times it’s only the executives who have access to that level of guidance.
It’s critical to be proactive in seeking out the right financial adviser who can guide you through these very specific tax and investment decisions.
Selling your shares right now might result in a sudden windfall. A fiduciary adviser who knows the arcane world of private stock compensation plans and doesn’t benefit from selling you funds or insurance can help you figure out how to go from having these valuable stock options on paper to being able to use them for things you need now. Maybe it’s a house down payment or paying off student loans, as well as helping you build a foundation for your financial future — not to mention helping you avoid paying a shocking tax bill that you never saw coming.
This is why it’s essential to consult with an expert compensation planner sooner rather than later so you can get the most out of this valuable opportunity and steer clear of expensive mistakes. Advisers urge startup employees to meet long before any transactions even take place in order to review the company’s stock plan and get to know the client ahead of time.
“Our typical client probably comes to us a year or two later than they should,” says Richard Archer, a certified financial planner and president of Archer Investment Management in Austin, Texas, who specializes in working with tech executives. He says most people wait to meet with him until after they have a liquidity event, such as an IPO, buyout or merger. “They have sudden money and want to know what they should do with it,” he says. “Statistically, this is going to happen to you only once in your lifetime.”
Soon is not soon enough
If they had met with him earlier, they could have done a lot more to reduce their tax liability, minimize the risk, and improve their financial situation for years into the future. The rules are complicated, and it’s easy to make costly technical missteps without professional guidance. In addition to helping them learn about their stock options and any opportunities to diversify, Archer also does a deep dive into clients’ employee benefits packages to find out whether they have access to any plans that can help them reduce their tax liability.
It can be difficult to research what to do on your own because there are many variations of stock options and equity stakes in startups, and each has its own nuances, vesting schedules and complex tax rules. “We realized that people don’t know what they have and where to find it,” says Shane Mason, a CPA and a CFP in New York City specializing in tax preparation and financial planning for owners and tech professionals at small and midsize businesses. They may have incentive stock options, non-qualified options, restricted stock units, employee stock purchase plans, or a profit-sharing plan, which can all work differently.
“Taxes are one thing and planning is another. In the dot-com space you need both,” says Mason. As an expert in all kinds of stock options, he helps people understand how their options work, the decisions they can make, and the tax consequences and strategies. “We’ve found over $100,000 in tax savings from past tax credits that other accountants and planners didn’t coordinate.” His clients were able to file amended returns and get the money back.
The other risk – betting too much on your company’s future prospects
Maybe you’d prefer not to liquidate your private shares at this time, because you think your company has a massive valuation. It might look promising on paper, so why not hold out until your company “goes IPO” and you’ll become a multimillionaire overnight?
Here’s the thing: A private company’s “valuation” can be everything or it may be meaningless. It depends on the market. Take WeWork, the space-sharing company that planned to go public for more than $45 billion. Two weeks later, WeWork’s valuation was down almost 70% and the IPO died.
The lesson here? Many people who work at startups have too much of their own money tied up in the company and are at a major financial risk if the business ends up having financial problems. Not only could the stock value fall, but they could also lose their jobs.
“Tech is an incredibly competitive industry, and what’s hot now could turn quickly or the funding can dry up,” says Archer.
Your stock options could be your one and only opportunity for a big windfall. The right stock compensation adviser can help you understand how to use them to help your finances even if you never experience a payday of this size again.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
With more than 25 years in investor advocacy, Pam Krueger is the founder and CEO of Wealthramp, an SEC-registered adviser matching platform that connects consumers with rigorously vetted and qualified fee-only financial advisers. She is also the creator and co-host of the award-winning MoneyTrack investor-education TV series, seen nationally on PBS, and Friends Talk Money podcast.
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