Does the 90-180 day lock-up period apply to shares I already own, or only to buying?

It applies to selling. If you already exercised and hold shares before the IPO, you generally cannot sell them until the lock-up expires, typically 90 to 180 days after the IPO (Mayer Brown).

What happens to my AMT payment if the startup fails after I exercise?

You may be able to claim an AMT credit or a capital loss in a later year, but this rarely offsets the full cash cost, and getting the credit back can take years. See our AMT credit explainer for how the credit mechanism works.

Can I exercise only some of my options before the IPO instead of all of them?

Yes, and many people do exactly this — exercising a portion they can afford to lose while leaving the rest unexercised until after the IPO reduces liquidity risk while still capturing some of the tax benefit.

Does this analysis differ for NSOs versus ISOs?

Yes. NSOs don't trigger AMT, but the entire spread at exercise is always ordinary income, so the tax argument for exercising early is weaker — it mainly matters for starting the capital-gains clock on future appreciation, not for the exercise-year tax bill itself. See our ISO vs. NSO tax differences guide.

What if I can't afford the strike price and AMT out of pocket?

That's what exercise financing exists for, though it comes with its own costs and risks — see the section above.

Should I exercise my stock options before an IPO?

Exercising stock options before IPO means paying now for an illiquid, uncertain asset. Here's the real trade-off, with worked numbers.

Exercising stock options before an IPO means paying the strike price (and possibly AMT) now, in cash, for shares you can't sell yet and a company that might never go public. In exchange, you start the clock on long-term capital gains tax and could owe far less tax if the company has a successful exit. It's a real bet with a real chance of losing money, not a guaranteed win.

Priya is two years into a 40-person startup that just told the company an IPO is "likely within 18 months." She has 20,000 vested options at a $2 strike price, the company's last funding round valued shares at $18, and she has $40,000 in savings. Exercising now would cost her $40,000 plus a possible tax bill — money she'd be locking into stock she can't sell for at least six more months after any IPO, in a company that could also just... not go public.

Key points

Exercising pre-IPO means paying the strike price (and possibly AMT) for shares that are illiquid and could still lose most of their value.
Waiting until after the IPO avoids that risk but usually means a higher spread, ordinary tax rates, and no long-term capital gains treatment on the eventual sale.
The right call depends on how much cash you can afford to risk, your tax situation, and your honest read on the company's odds — there's no version of this that's risk-free.

The core trade-off, in plain terms

Here's the intuition. Every stock option is really two things bolted together: the right to buy at a fixed price, and the clock that starts running on capital gains tax once you actually own the shares.

If you exercise before the IPO, you pay the strike price now, you might trigger the Alternative Minimum Tax (AMT) on the paper gain even though you can't sell a single share, and you're betting real cash on a company that hasn't proven it can go public at all. What you get in return is the possibility of paying long-term capital gains tax instead of ordinary income tax on a much bigger chunk of your eventual gain, assuming the company succeeds.

If you wait until after the IPO to exercise, you skip all of that risk. You'll know the stock is liquid, you'll know the real price, and you won't have paid cash into a company that might fold. The cost is that you'll typically owe ordinary income tax (for NSOs) or AMT (for ISOs) on a much larger spread — the difference between your strike price and the now-public stock price is usually far larger than it was pre-IPO — and any capital gains clock only starts once you exercise, which for most employees is at or after the IPO itself.

In short: exercising early is a bet that (a) the company will have a successful exit and (b) you can afford to lose the cash you put in if it doesn't. Waiting is safer but usually more expensive in taxes if the bet would have paid off.

Why exercising early can lower your tax bill

If you hold Incentive Stock Options (ISOs) and meet the required holding periods — more than two years from the grant date and more than one year from the exercise date — the entire gain when you sell is taxed at long-term capital gains rates instead of ordinary income rates (IRS Topic 427; IRS Publication 525). For 2026, long-term capital gains rates top out at 20% (plus a 3.8% Net Investment Income Tax for high earners), versus ordinary income rates that go up to 37% (IRS Rev. Proc. 2025-32).

The catch: exercising an ISO can trigger AMT on the "bargain element" — the spread between what you paid and the stock's fair market value at exercise — even though you haven't sold anything and can't yet (IRS Instructions for Form 6251). Pre-IPO, that fair market value is usually low (often set by an independent 409A valuation), so the AMT hit is often small or zero. Post-IPO, the fair market value is the public trading price, which is frequently many times higher — meaning the same exercise can trigger a much larger AMT bill. This is the single biggest reason employees consider exercising before an IPO: the spread, and therefore the tax cost, tends to grow enormous once the stock is public.

If you hold Non-Qualified Stock Options (NSOs), there's no AMT question, but the entire spread at exercise is taxed as ordinary income regardless of when you exercise. Exercising early still starts your capital gains clock earlier and locks in a smaller spread, but it doesn't avoid a tax event the way it can help with ISOs.

The liquidity problem: you still can't sell right away

Even after a successful IPO, you're not free to sell immediately. Underwriters almost always require a lock-up period — typically 90 to 180 days after the IPO — during which insiders and employees cannot sell shares (Mayer Brown; Center Point Securities). So exercising pre-IPO doesn't just mean betting on the company going public — it means holding illiquid stock through the IPO itself and for months afterward, all while the stock could be volatile (lock-up expirations are associated with an average 1-3% price decline as more shares hit the market, per MarketBeat).

Three realistic scenarios

Startups don't all become the next big public company. Here's how the pre-IPO exercise decision plays out across three honest outcomes.

Successful IPO. The company goes public at a strong valuation and the stock holds or grows. Employees who exercised early and held past the ISO holding periods pay long-term capital gains rates on a much larger gain. This is the scenario early exercise is designed for, and it can be worth tens of thousands of dollars.
Mediocre or flat IPO. The company goes public, but the stock trades sideways or below the last private valuation. Employees who exercised early tied up cash for a return that may not beat what they'd have earned just leaving it in an index fund, and they may have paid AMT on a valuation that didn't hold up. Not a disaster, but not obviously worth it either.
Failed startup. The company never goes public, gets acquired for less than the option value implied, or shuts down. Employees who exercised early have simply lost the cash they put in — the strike price and any AMT paid are usually gone for good, sometimes partially recoverable as a capital loss or AMT credit, but rarely dollar-for-dollar.

Be honest with yourself about which scenario is most likely. Most startups do not have a successful IPO. Exercising early is a real financial bet on an uncertain outcome, not a clever tax hack with no downside.

A worked example

Meet Jordan, a 32-year-old engineer at a startup called Fintra. Jordan has 10,000 vested ISOs with a $3 strike price. The company's last 409A valuation puts the fair market value at $5 per share. Jordan is single, earns $180,000 in salary, and is deciding whether to exercise now, 18 months before Fintra's expected IPO, or wait and exercise when Fintra goes public.

Scenario A — Jordan exercises now, IPO is a success. Jordan pays the strike price: 10,000 × $3 = $30,000 cash out the door. The bargain element (10,000 × ($5 − $3) = $20,000) is an AMT preference item, but at Jordan's income level this doesn't trigger significant additional AMT given the AMT exemption phase-out starts at $500,000 of income for single filers in 2026 (IRS Rev. Proc. 2025-32) — assume a modest $2,000 AMT cost. Eighteen months later, Fintra IPOs at $30 per share. Jordan waits out the 180-day lock-up, then, more than a year after exercising and more than two years after the grant, sells all 10,000 shares at $30.

Total gain: 10,000 × ($30 − $3) = $270,000
This is a qualifying disposition, so the entire gain is a long-term capital gain, taxed at 20% federal (Jordan's income puts the gain in the top bracket) = $54,000
Cash paid in: $30,000 exercise + $2,000 AMT = $32,000
Net after-tax proceeds: $270,000 − $54,000 − $32,000 (already spent, but subtract as cost) = $184,000 net gain on a $32,000 investment

Scenario B — Jordan waits and exercises at the IPO, same $30 price. Jordan exercises the day of the IPO when the stock is $30. The bargain element is now 10,000 × ($30 − $3) = $270,000, all of it taxed as AMT income in the exercise year — for ISOs held and sold quickly after an IPO, this typically becomes a disqualifying disposition if sold within a year, converting the spread to ordinary income. Assume Jordan sells immediately after the lock-up lifts, six months after exercise, at the same $30.

Ordinary income on the $270,000 spread, taxed near Jordan's marginal rate of 35% = roughly $94,500
No further gain since the sale price equals the exercise-date price
Cash paid in: $30,000 exercise price (no separate AMT bill in this case since it's absorbed into the disqualifying disposition's ordinary tax)
Net after-tax proceeds: $270,000 − $94,500 − $30,000 = $145,500 net gain

In this successful-exit scenario, exercising early nets Jordan roughly $38,500 more, purely from converting ordinary income into long-term capital gains. That gap gets bigger the more the stock appreciates after exercise, and disappears or reverses if the IPO underwhelms or the company fails — in which case Jordan's $32,000 in Scenario A is simply gone.

How exercise financing fits in

Some employees who want to exercise early but don't have $30,000-plus in spare cash use exercise financing — a loan secured by the shares themselves, or sometimes non-recourse financing offered by third-party firms. This can make early exercise possible without draining savings, but it adds interest costs and, with recourse loans, the risk of owing money even if the stock goes to zero. Treat financing as a tool to evaluate carefully, not a way to eliminate the underlying bet.

How WealthOS helps

Connect your grant details in WealthOS and we'll model your specific exercise-now versus exercise-at-IPO numbers, including your actual AMT exposure and holding-period math, instead of relying on general examples like Jordan's.

Frequently asked questions

Does the 90-180 day lock-up period apply to shares I already own, or only to buying?: It applies to selling. If you already exercised and hold shares before the IPO, you generally cannot sell them until the lock-up expires, typically 90 to 180 days after the IPO (Mayer Brown).
What happens to my AMT payment if the startup fails after I exercise?: You may be able to claim an AMT credit or a capital loss in a later year, but this rarely offsets the full cash cost, and getting the credit back can take years. See our AMT credit explainer for how the credit mechanism works.
Can I exercise only some of my options before the IPO instead of all of them?: Yes, and many people do exactly this — exercising a portion they can afford to lose while leaving the rest unexercised until after the IPO reduces liquidity risk while still capturing some of the tax benefit.
Does this analysis differ for NSOs versus ISOs?: Yes. NSOs don't trigger AMT, but the entire spread at exercise is always ordinary income, so the tax argument for exercising early is weaker — it mainly matters for starting the capital-gains clock on future appreciation, not for the exercise-year tax bill itself. See our ISO vs. NSO tax differences guide.
What if I can't afford the strike price and AMT out of pocket?: That's what exercise financing exists for, though it comes with its own costs and risks — see the section above.

Sources

This article is educational and not tax, legal, or financial advice. Talk to a CPA or tax advisor about your specific situation.

Educational content, not tax advice. Your outcome depends on your grant documents, income and state. Equity Tax Engine models your actual position — join the waitlist.