Is exercising stock options right before a company goes public a good idea? With SpaceX, OpenAI, Anthropic, and others set to go public in 2026, we’re getting a lot of questions employees with stock options asking if they should exercise in the months leading up to an expected IPO. In most cases, exercising options right before an IPO is prohibitive from a liquidity and/or tax perspective. Newly public companies are also notoriously volatile, so it’s also a risky move financially. Here’s more on when to consider pre-IPO exercises.
Exercising stock options before an IPO
The upside of a well-timed exercise is clear: potential for significant tax savings and reducing the time you need to hold the stock to qualify for long-term capital gains tax rates. Unfortunately, for those tax savings to materialize, the post-IPO stock price at sale must be considerably more than the pre-IPO valuation at exercise.
Most companies go public at their highest historical valuation. And expecting to go public and actually doing it are two different things. Even a delayed IPO can create a serious cash crunch for taxes depending on the timing of an exercise, April 15th, and when the lockup ends.
Two key points about exercising pre-IPO stock options:
- Exercising stock options well ahead of an IPO can create massive value in the right circumstances
- Exercises weeks or months ahead of a public offering involve more risk and can be prohibitive from a cash flow standpoint. This is the focus of this article.
Before discussing when it may make sense to consider exercising right before an IPO, we should first talk about when it does not make sense to consider it. So let’s get that out of the way first.
Pre-IPO exercise challenge is liquidity and taxes
Even if it might make sense financially, from a practical standpoint, most employees face significant hurdles exercising stock options in the weeks or months leading up to an anticipated public offering. This is because of the cash needed to buy the stock or pay taxes. Early employees can usually exercise cheaply, but the taxable spread is massive. The opposite is usually true for more recent hires.
Early employee:
- Options vested: 100,000
- Strike price: 10 cents
- Last 409a: $20
- Cost to exercise and buy the shares: $10,000
- Spread (for the alternative minimum tax if you have ISOs or taxable spread as regular income with required withholding if NQSOs ignoring payroll tax): $1.99M
While likely the employee could come up with $10k to exercise the shares, the spread from the exercise is massive and is sure to result in a huge tax bill.
Many early employees have incentive stock options (ISOs) so the main concern is AMT exposure. Even if the IPO was early in the year, leaving you plenty of time to get past the 180-day lockup and still meet a 1-year post-exercise holding period to sell shares in the open market to pay the tax next April, it’s still a major risk.
You might be forced to sell potentially a lot of stock at depressed market prices, not to mention other issues that can arise for insiders or if daily trading volumes make it difficult to exit. (In the reverse, when the IPO is late in the year, you might still be in a lockup come April, a potential problem for those with ISOs).
Regular employee or recent hire:
- Options vested: 25,000
- Strike price: $13
- Last 409a: $20
- Cost to exercise and buy the shares: $325,000
- Spread (for the alternative minimum tax if you have ISOs or taxable spread as regular income with required withholding if NQSOs ignoring payroll tax): $175,000
Now, the main hurdle is coming up with $325,000 to buy the stock. Although the spread is still considerable, at the 22% statutory withholding rate for non-qualified stock options (if under $1M), the tax due with simple hypothetical math is ‘only’ about $38,500.
In 2026, the AMT exemption for married couples is $140,200 ($91,100 single) so if this individual had ISOs, depending on the rest of their tax situation and income, the actual AMT tax due could be relatively small. However, the income phaseout ranges could negate the AMT exemption altogether: $500,000 to $680,350 for single filers and $1,000,000 to $1,280,400 for joint filers.
A concentrated stock holding already carries a lot of risk, so we don’t recommend individuals consider taking on debt to fund the exercise of stock options.
Avoiding AMT When Exercising Incentive Stock Options
Lockup periods
If you can only make the math work by banking on liquidity when the typical 6-month lockup ends, you might want to rethink that. Perhaps you have material non-public information or your company adopts a restrictive trading policy. The company might not have a traditional lockup period, either. For example, SpaceX underwriters are considering ways to limit sales of employee stock to avoid an over-supply in the market. Companies will develop their own trading policies, including pre-approval requirements, so employees shouldn’t expect unrestricted ability to sell in the first open trading window. These policies aren’t usually finalized until the first open window is imminent.
When to consider a pre-IPO exercise window
If you have other outside assets and cash available to fund the exercise of the options and projected (or actual) tax due, then it may make sense to weigh the pre-IPO exercise of all, or a portion of, your options.
Here are some factors to consider in your decision:
- Cash needed to exercise vs your liquid resources
- Path to liquidity given your post-lockup diversification strategy
- Your objective assessment of the current 409a valuation relative to other potential outcomes for the stock (like up 50% or down 50%) and conviction in the company’s outlook
- Potential tax planning opportunities by spreading exercises of vested shares over 2 calendar years
- State tax planning opportunities if considering relocating
- Your plans to leave the company after the IPO (your window to exercise will be limited after you leave but you’ll eventually have more flexibility in trading)
- Your tax situation may be more favorable the current year if the lockup ends the next year as you’ll want to sell and diversify
Other risks
It’s easy to get sidetracked at the thought of making moves to save big on taxes. Stocks don’t only go up, so it’s important to consider the timing of the exercise in the context of your larger financial picture. Here are some things to consider when managing your stock options in anticipation of an IPO.
- Stock might not be higher as a public company. Professor Jay Ritter from the University of Florida has done extensive research on IPOs. His research found that relative to similar market cap companies, IPOs underperformed by .3% in the first 6 months. Over the next 6 months, the underperformance gap was 5.6% (when you can trade). Longer run performance relative to similar firms for IPOs between 1980 – 2023 (returns through 2024): second year -7.9%, third year: -3.4%, fourth year 1.7%, fifth year: -2.4%, geometric mean for the first 5 years: -3.6%.
- IPO might not happen. Consider where your employer is in the IPO filing process because once-eminent IPOs have paused before (Instacart among many others) which can create big liquidity issues.
- More ways to exercise later. Once the company is public, you’ll have more ways to exercise, such as cashless (exercise and sell same-day) and net exercises (exercise using shares to cover the cost, hold the rest). This is a way for the shares to fund the exercise without dipping into your diversified assets/cash reserves. Also, sometimes it’s better to skip the long-term holding period and the risk that comes with it. Some private companies offer net exercises but you’ll definitely have the option after the IPO lockup.
Financial advisor for stock options and sudden wealth
Darrow Wealth Management specializes in stock options and equity compensation. If your employer is going public, work with an advisor experienced with strategic stock option planning, tax implications, and strategies to best manage sudden wealth.
Tax Planning for ISOs and Stock Options
[Last reviewed January 2026]
