Stock Option Exercise Checklist

Stock Option Exercise ChecklistCongratulations, you’ve gotten your company off the ground.  You’ve incorporated, issued founder shares and filed 83(b) elections, adopted a stock option plan, granted stock options, and been working on your business for a while.  Now an employee who has been with you since the start wants to exercise a stock option that has vested in part.  What do you do?

Recommended Steps

I recommend that you take the following steps as you process each option exercise:

  • Review the stock option exercise notice; confirm that it is completed correctly and executed by optionee.
  • Make sure that you have all of the optionee’s original stock option paperwork signed and in the files (meaning, the notice of grant of stock option or stock option agreement).
  • Confirm that option was approved by the Board in minutes and/or a Board consent.
  • Confirm that your Rule 701 math was correct, and that you are operating within Rule 701’s limitations and conditions.
  • Was the optionee terminated and in connection therewith did the optionee execute a release of all claims?  If so, did the release terminate the stock option?
  • Confirm the tax status of the option being exercised—nonqualified stock option (NQO) or statutory (incentive) stock options (ISO)?  Is it in part an ISO and in part an NQO?
  • Make sure the optionee is only exercising with respect to vested options or options that are not vested but immediately exercisable.
  • Confirm Blue Sky securities law compliance. (In which state does the optionee reside? Are securities filings required?)
  • Does the Company have a repurchase option with respect to the shares?  Will the Company exercise its repurchase option?
  • Determine whether the Board of Directors needs to make a new determination of the fair market value of the shares to determine the tax withholding or ISO adjustment amount.
  • Calculate the tax withholding (including but not limited to federal income and federal employment) if the option is an NQO (if the option is an ISO, make sure employee understands AMT tax consequences and be sure to send notification of ISO gain to employee and IRS).
  • Make sure to obtain from the exercising optionee the strike price plus the tax withholding, if tax withholding is required.
  • Consider providing the optionee with disclosure of some of the material risks of buying the securities.  A bullet point list of risk factors, financial statements, for example.
  • Have Company counsel prepare a stock certificate and stock certificate receipt.
  • Update the Company’s capitalization table.
  • Make sure payroll is aware of the exercise and properly reports the exercise on wage statements/Forms W-2, or ISO adjustment notification.


Don’t rush through this process and miss an important step!

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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  • Danan Margason

    Great post, as always!

    So what happens if the employee who owns shares is terminated and has a set period of time to exercise on vested options (say, 3 months), but the company also elects to use its repurchase option. The employee exercises on the vested options after 2.5 months. Does the repurchase occur in two phases, first for shares s/he owns and again for the second set of exercised options? Does the company wait to repurchase until the additional time period has expired (could be as long as a year)? Does it matter?

    • Joe Wallin

      I usually see just one repurchase happen. I’ve also seen employers just tell employees that they are going to repurchase and then parties work out an agreement.

  • Betty Johnson

    I received a stock option incentive with a start-up company that I left after 1 year. I am 50% vested after 1 year but I was issued a stock certificate for 100% of the shares when I started with the company. Now, the company is asking for my certificate back so they can send me a certificate that reflects my vested shares. Is this common?

  • Ryan

    Can you explain what the expiration date should be in relation to the Date of Grant? eg. if we are giving nonstatutuory stock options to a consultant, what kind of expiration date should be stated?

    • Joe Wallin

      Typically an option is only exercisable during the term of service and 90 days thereafter, once vested.

      • Ryan

        right, but at the top of the Grant, it says, “Expiration Date:” and later in the doc it says, “(but in no event later than the Expiration Date set forth above)”…what is the standard Expiration Date that is put there?

        • Joe Wallin

          10 years. Although some companies do 7, and some do 5.

          • Ryan

            gotcha, thanks!

  • Wolf

    How long after paying an ISO exercise price does a company have to issue a stock certificate? I paid for one via check several months ago and was told their attorneys were working on it and the process is slow. Could this be a sign the company is being sold or going under?

    • Joe Wallin

      More likely the lawyers are just busy.

  • Mike Pendergast

    Joe- I own ISO vested shares in an company that has recently registered for an IPO. I paid for them in 2011 and recieved an updated personal summary when they had a forward stock split with my new balance, but i have still not recieved the certificates. I believe they are holding shares under rule 701(?) So how can i get the certificates from them into my brokerage account to possibly exersise on the inital day of trading or in future? And is company required to let me know about the date they will start to be publicly traded? Thanks- Mike

    • Joe Wallin

      I would ask your company’s CFO or Chief People Person….