🌎 International equity

Should you allow your international employees to “early exercise” their stock options?

Not sure what "early exercise" means? This article is for you.

Definition of early exercise

Stock Options 101

Quick recap of what stock options are: when you’re granted stock options as an employee, you have the right to buy shares of the company you are working for (or another company of the group) if you pay a certain price called exercise price or strike price, which usually correspond to the value of the shares at the time of grant.

Stock options are such a great motivation and retention tool because they usually come with what we call a vesting schedule.

Vesting means you can’t buy the shares straight away, you need to work for the company for a certain period of time before you can buy them, e.g. you can buy 1/4th of the shares after 1 year of service then gradually more over time until you can buy 100% of the shares (typically after 4 years).

If the company’s value goes up, you can buy the shares at a discount compared to their current value.

ℹ️ Let’s say that in 2021 John Doe received options to buy 100,000 shares of a Delaware C-Corp called Acme, Inc. at a strike price of 1$ each.

In 2023, the shares of Acme, Inc. are now worth 5$ each. If John Doe exercises, he would buy each share at a 4$ discount compared to their current value.

What’s early exercise of stock options?

Let’s start by what it is not: a vesting acceleration.

Both concepts are often mixed in practice. Although there are some similarities because both allow you not to wait until the regular end of your vesting schedule to buy shares, the comparison stops there.

To simplify, acceleration 🏎️ 💨 enables you to vest faster, typically when either the company you work for is being acquired (”single trigger”) or the company you work for is being acquired and that you’re fired as part of the acquisition (”double trigger”).

Early exercise is buying shares that haven’t vested yet.

Early exercise enables you to buy shares before waiting for the end of your vesting schedule 👉 You could receive stock options on Day 1️⃣, and pay the strike price to buy the shares on that same day!

We said earlier that stock options were a great retention tool because they come with a vesting schedule. Why the hell would you, as an employer, want to allow your employees to early exercise then?

Here’s the trick: if you early exercise, you become a shareholder, but your employer still has the right to buy back the shares that haven’t vested yet. So there’s still a vesting schedule but it’s attached to your shares rather than to your options.

If you leave the company, your employer will generally have the possibility to repurchase the shares, typically at the same price as the one you’ve paid to buy them.

Why early exercise at all?

Why can early exercise be good for international (non US) employees?

Like with many things that first seem absurd or useless until you have a closer look at them, the primary reason is money, and more particularly taxes.

Early exercise is also interesting in certain cases if your employee is based in the US, but this article is focused on non-US employees only.

Stock Options Taxation for Dummies.

To keep it short and simple, there are two different types of gains which are taxed with stock options:

1️⃣ When you exercise your stock options

Often, the difference between the value of the shares at the time you exercise and the strike price (sometimes called the “spread” or the “bargain element”) is taxed as salary income. Salary income is very often taxed at progressive income tax rates 👉 the more income you have, the more you’re taxed.  Sadly, salary income is often the most taxed type of income.

2️⃣ When you sell the shares

Often, the difference between the price at which you sell the shares and the value of the shares at the time you exercised the stock options is taxed as capital gains. Capital gains are usually taxed at a flat rate, which is usually lower than the rates applicable to salary income.

Ideal timing to early exercise

The earlier the exercise, the better from a tax perspective.

  • Let’s take the example of John Doe and Acme, Inc. who lives and works in Wonderland and earns 100,000$/year.
  • Wonderland taxes professional income at progressive income rates that start at 10% and gradually go up to 50%.
  • Wonderland taxes capital gains at a fixed 10% rate.
  • On the basis of his yearly earnings, John Doe’s salary is taxed at an average rate of 40%.

No early exercise

1️⃣ Taxation at exercise

John Doe buys 100,000 shares valued at 5$, against a strike price of 1$.

Taxes = (100,000 x (5$ - 1$)) x 40% ▶️ 40% of 400,000$ = 160,000$

2️⃣ Taxation at sale

In 2025, John Doe sells the 100,000 shares now valued at 10$ each.

Taxes = (100,000 x (10$ - 5$)) x 10% ▶️ 10% of 500,000$ = 50,000$

👉 Total tax amount paid in Wonderland without early exercise = 210,000$

⏰ Early exercise

1️⃣ Taxation at exercise

John Doe buys 100,000 shares on the same day he receives the stock options. John Doe buys the shares at their current price of 1$ each.

Taxes = (100,000 x (1$ - 1$)) x 40% ▶️ 0$

2️⃣ Taxation at sale

In 2025, John Doe sells the 100,000 shares now valued at 10$ each.

Taxes = (100,000 x (10$ - 1$)) x 10% ▶️ 10% of 900,000$ = 90,000$

👉 Total tax amount paid in Wonderland with early exercise = 90,000$

Why can early exercise be bad?

The employee perspective

  1. The earlier you exercise, the less visibility you have on the company’s business prospects. On the other hand, if you wait until the end of your vesting schedule you have more time to see how the company goes and whether you’ll eventually have the opportunity to sell your shares, for instance as part of an acquisition (M&A).
  2. (Tax) laws change. It may be interesting to early exercise when you choose to early exercise, but laws change and it could be that tomorrow the country in which your income is taxed tightens its grip and, for instance, taxes capital gains in the same way as salary income or even more.

The employer perspective

  1. Early exercise are a bit harder to manage if someone leaves the company before the end of the vesting schedule compared to stock options that haven’t vested (which simply go back to the ESOP pool without additional paperwork).
  2. Allowing early exercise to certain employees and not to others (even for valid reasons) can give rise to perceived unfairness.

Our checklist

What you should do when deciding whether to allow early exercise (as employer) or early exercise (as employee)

  1. Check whether it makes sense on the basis of the country of residence and work relationship (what can be good for an employee is not necessarily good for a contractor) Good news! 🌍 Easop has listed the countries and work relationships (contractors, direct employees, EoR employees) where it’s interesting to offer early exercise.
  2. Here’s a few of them: Austria, Croatia, Italy, Germany, Kenya, Lebanon, Nigeria, Portugal
  3. If you want to know more → contact us at hello@easop.com
  4. Don’t offer early exercise if your employee is not aware of the tax benefits
  5. As an employee, check if your employer has allowed you to early exercise and make sure you understand the pros and cons. This can easily be done if you’ve been granted an access to Easop.