Should I Sell Some of My Vested NSOs to Finance the Purchase of Vested NSOs?

The answer depends on the situation. If your NSO options are not expiring, we almost always recommend against this. If your NSO options are expiring however, this strategy can be considered to balance how much (if any) cash you pay out of pocket.

If your NSOs are not expiring, this likely isnt a good idea

With equity compensation, you have both explicit stock ownership (shares you own), and implicit stock ownership (shares you have economic benefit from due to vested stock options. Taken together, we call this your "holistic exposure."

The reason this "sell some NSOs to buy other NSOs" question is typically asked is individuals are very bullish on the company, and seeking to improve the taxation of future appreciation to be long-term capital gains versus income (for more details see: Exercise NSOs Earlier). In this case however, one would actually end up worse off economically by selling some vested NSOs and using the proceeds to buy other vested NSOs. For example:

• ZoomZoomZoom Corp. is currently trading at $50 per share

• Anita has 10,000 NSO options with a $5 strike price and is very bullish on the company

• Let's assume that the NSOs will not expire for another 5 years, and 2 years from now ZoomZoomZoom increases in value to $100 per share

• If Anita did nothing today, her value in 2 years would be:

  • In two years the pretax value of her NSOs would be $950,000 (10,000 options with $100-$5 = $95 in value per unit)

  • Assume the applicable tax rate on this would be 39.35% (37% federal + 2.35% Medicare; no social security; no state tax)

  • In two years the after tax value of her ZoomZoomZoom exposure is $576,175

• If Anita sold NSOs today to exercise other NSOs, her value in 2 years would be:

  • Today, Anita exercises all 10,000 NSOs

  • Assume the applicable tax rate on this would be 39.35% (37% federal + 2.35% Medicare; no social security; no state tax)

  • Anita sells 3,935 shares to cover the tax bill today ($177,075), and retains 6,065 shares for long term

  • In two years the after tax value of her ZoomZoomZoom exposure is $462,153 (6,065 shares, less a 23.8% long-term capital gain and NIIT tax on the $50 gain per share post exercise)