Exercise

A stock option is a right, not a share. Until it is exercised the holder owns nothing in the company, and an option that expires unexercised is worth nothing. Exercising is the step in between: the holder pays the strike times the shares, and the company issues the shares.

Only vested options can be exercised, and only until the grant's exercise window closes. An exercise can cover part of a grant, so one grant can carry several exercises on different dates, each at its own FMV.

The exercise date fixes two figures. The cost is the strike times the shares. The spread is the FMV that day minus the strike, times the shares, and on an NSO that spread is ordinary income in the exercise year; on an ISO it counts toward the alternative minimum tax. The holding period for a long-term capital gain on the shares starts the day after the exercise.

An employee has 1,000 vested options with a $2.00 strike and exercises all of them on a day the company's 409A is $5.00. The exercise costs $2,000 in cash.

The spread that day is $3.00 a share, or $3,000. At a private company the $2,000 is due now and the shares may not be sellable to cover it; the $3,000 is either ordinary income or an AMT adjustment, depending on the grant's type.

Strike, per share

$2.00

Shares exercised

× 1,000

Cost of the exercise

$2,000

An exercise is where an option grant turns into cash out and tax in. The cash is the strike; the tax rests on the spread, and both are set by the FMV on the day, so the same 1,000 options cost the same but produce a different spread in different months.

It is also the start of the record for the shares. Their holding period starts the day after the exercise, and the FMV on the exercise date fixes their cost basis on an NSO and their AMT basis on an ISO, whose regular-tax basis is the strike. A later sale is taxed against those facts, and a private-company exercise with no record of the FMV that day leaves the sum unanswerable.

In Taiga Finance an exercise is logged against any vested option grant from its drawer: “Date”, “Shares”, “Price paid / sh” prefilled from the grant strike, “FMV that day / sh” prefilled from the company's 409A on that date, and “Treated as”, whose “NSO” option records a post-termination exercise on an ISO grant. The “Cost” shows before it saves.

Saved exercises sit in the grant's “Exercise history” with the date, shares, price paid, cost and the FMV then, and the drawer's “Exercised” count and amount paid update. A grant's owned shares count in Investments and net worth at the share of value the grant record is set to count; unexercised options stay out of net worth. Carta's exercises export imports as CSV, matched to grants at review.