I wish I knew this before Exercising My ISOs
Exercising your Incentive Stock Options (ISOs) can be life-changing — but it can also be financially devastating if you don’t know the traps. I nearly lost $24,000 in unnecessary taxes the first time I exercised. Since then, as a Certified Financial Planner® advising on more than a million shares of equity for 8-figure tech executives, I’ve learned exactly which pitfalls to avoid.
In this guide, I’ll walk you through:
The biggest stock option tax myth that’s cost employees their fortunes for decades
Why taxes aren’t the #1 factor when making exercise decisions
How to make smart choices by prioritizing financial merit, risk, and personal goals
By the end, you’ll know how to exercise your ISOs with confidence — without needing to become a tax expert.
Myth #1: Taxes Should Drive Every Stock Option Decision
Most people believe the smartest move is the one with the lowest tax bill. But that’s like buying something on sale you never actually wanted — you still waste your money.
The same happens with stock options. If you only optimize for taxes, you risk making decisions you’ll regret for years. Taxes matter, but they’re not the whole picture.
Step 1: Optimize for Financial Merit
Would you rather have $1,000,000 in cash, or 50% of $1,000,000? Obviously the full amount. But many employees unknowingly lock in losses by focusing only on their tax bill.
Take a real example: a family member once asked me how to exercise his startup options. He could’ve exercised at $0 tax cost — but the stock was underwater, worth less than the exercise cost. That move would have locked in a guaranteed loss.
👉 The smarter approach: prioritize financial merit first. Taxes are only a slice of the pie — they should never outweigh the actual value of your gain.
Step 2: Manage Your Risk
I’ve seen employees exercise large ISO blocks and trigger six-figure Alternative Minimum Tax (AMT) bills, only to panic when their stock plummeted. One client even considered selling their home to cover the tax bill.
Before exercising, ask two key questions:
Emotional Risk Test — Will I be able to sleep at night with this risk?
Financial Risk Test — Can I afford to lose this money without blowing up my financial future?
If the answer to either is “no,” then waiting or scaling back is the safer move.
Step 3: Align With Your Values and Goals
Even if the numbers check out, there’s one more filter: your purpose.
Are you exercising to diversify? To fund a future goal? To create flexibility? Or are you just reacting to fear of taxes or FOMO?
Without clarity, you’re more likely to chase “deals” that don’t serve you — the financial equivalent of buying spicy seafood just because it was half off.
👉 Anchor every decision to your bigger goals. That way, you’ll know whether exercising now actually moves you closer to what matters most.
The Final Piece: Timing
Even with the right framework, timing your exercise can be the difference between a $0 tax bill and a crushing liability.
That’s why my next post covers the 3 smartest times to exercise ISOs — so you can act with total confidence and never leave money (or peace of mind) on the table.
