- Cost to exercise
- 24,000 EUR
- Gross gain
- 156,000 EUR
- Estimated tax
- 54,600 EUR
- Net after tax
- 101,400 EUR
Estimating pre tax gains from option exercise
The pre tax gain on a stock option grant is calculated as the number of options multiplied by the difference between the future share price and the strike price. Separately, the cash cost to exercise is the number of options multiplied by the strike price alone, which must be paid regardless of whether the shares are later sold at a profit.
- Number of options: the total options in the grant, or the vested portion if only part has vested
- Strike price: the fixed price per share set at grant
- Future share price: an assumed value at exercise or sale, based on a funding round or exit
Example gain for two thousand vested options
An employee holds 2,000 fully vested options with a strike price of 1.50 euros. The company later has shares valued at 6 euros. The cash cost to exercise all options is 2,000 multiplied by 1.50 euros, which is 3,000 euros. The pre tax gain is 2,000 multiplied by the difference between 6 euros and 1.50 euros, which is 4.50 euros, giving a gain of 9,000 euros. The employee needs 3,000 euros in cash to exercise, before receiving any of the 9,000 euro gain, unless the shares are sold at the same time to cover the cost, before any equity tax due on the gain.
If the future share price ends up below the strike price, the options are worthless and should not be exercised, since exercising would mean paying more than the shares are worth, a scenario the equity calculator can also model.
Excluding income tax and exercise window limits
- The future share price is an assumption, not a guaranteed outcome
- The result excludes income tax on the gain and any capital gains tax due on a later sale
- It assumes the options are exercisable, which requires vesting to be complete and the option scheme to allow exercise at that time
Working out an option gain: what people ask
- Do I need cash to exercise options?
- Usually yes, unless the company or scheme allows a cashless exercise where some shares are sold immediately to cover the strike price and any tax due.
- What if the strike price is higher than the current share price?
- The options are described as underwater and have no value to exercise, since it would cost more than the shares are currently worth.
- Does this calculator include tax?
- No, it shows the pre tax gain and exercise cost only. Actual tax due depends on the country and the type of option scheme used.
General information for founders, not legal or tax advice. Thresholds and rates change, so confirm the current position with an adviser in the relevant country before granting.