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Equity remains one of the hallmarks of working at a startup. But while it鈥檚 something most employees receive, it鈥檚 not something that all take advantage of.

Factors abound when considering if and when to exercise your stock options. In the spirit of tax season and a pent-up IPO pipeline, we talked to some equity experts about what employees should keep in mind when making decisions around their equity.

But while it鈥檚 a benefit some employees receive, it carries with it a cloud of mystery, and everyone鈥檚 situation differs. One factor seems clear: You should think about equity early.

When employees typically start to think about exercising their options

Platforms like , a startup focused on equity planning and stock option planning, generally see a 鈥渉uge influx鈥� of people to the platform when there鈥檚 any sort of financial announcement concerning their company, such as news of a funding round or IPO paperwork being filed, according to , Secfi鈥檚 senior director of equity strategy.

But the optimal time to exercise options is 鈥渦sually before that,鈥� he said.

鈥淲hat I always tell people is that it鈥檚 hard to predict the future 鈥� but if you assume your company is going to continue to grow, earlier is better,鈥� Piauwasdy said.

The main reason earlier is better? Taxes.

Generally speaking, a startup鈥檚 valuation goes up as time goes on, as well as with each funding round. Of course the exceptions are 鈥渄own rounds鈥� or situations like that of , which lowered its own valuation after taking public market conditions into consideration.聽

Startups must get what鈥檚 known as a 409A, or 鈥渇air market value鈥� at minimum once a year, per rules. A big funding round, acquisition or another significant event triggers another 409A reevaluation. With each passing funding round, a company鈥檚 fair market value typically goes up, and that will increase a person鈥檚 tax bill quite a bit.聽

For incentive stock options鈥攑opular among startups鈥攊n addition to paying the strike price to buy those stock options, employees face taxes based on the difference in a company鈥檚 fair market value, and could potentially be exposed to alternative minimum tax as well.

Startup employees paid $11 billion in avoidable taxes last year by exercising their stock options post-exit, rather than pre-exit, 听听

What the pros say

provides financial planning and wealth management services to tech professionals and聽 other employee stock options owners. The majority of people come to Babylon when there鈥檚 some sort of liquidity event coming up, such as a tender offer, acquisition, or IPO, according to the firm鈥檚 founder,

鈥淭he people who start planning early and start exercising early tend to have some advantages in terms of paying taxes, making sure they鈥檙e making more informed decisions, and having more flexibility when that payday comes,鈥� Panayotov said.

It gets more cost-prohibitive to exercise your options as your company鈥檚 fair market value goes up, Piauwasdy said, and many people have found themselves in the situation where a big funding round happens and suddenly their equity is unaffordable.

When you can鈥檛 exercise your options

A company in the middle of fundraising that鈥檚 expecting to sign a term sheet soon will enter into what鈥檚 known as a 鈥渂lackout period.鈥� That means employees can鈥檛 exercise their options at that time.

鈥淩eally, the goal is to get ahead of that,鈥� Piauwasdy said. 鈥淚f you have some knowledge that your company is fundraising and you know it鈥檚 going to be a significant increase in valuation, of course it might be a good idea to exercise at that time.鈥�

Secfi usually sees a big uptick in people visiting its platform when headlines and rumors about a company fundraising or going public swirl, Piauwasdy said.聽

Planning early and considering your options well before a big event, such as an IPO, comes with many advantages, according to Panayotov.

By exercising early and paying taxes earlier, employees could save money down the line when they sell their shares. That鈥檚 because some of their gains could convert into long-term capital gains, which are taxed at a lower rate. Many companies now also offer the option to exercise early, or before shares have vested.

鈥淭ry to exercise them as early as possible, especially if you believe in your company,鈥� Panayotov said. 鈥淚f you believe your company has a bright future, exercise as early as possible.鈥�

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