Should you allow international employees to “early exercise”?

Thinking about allowing your international employees to “early exercise” their stock options? You’re not alone.

Equity is a powerful tool to attract and retain top global talent. But like most things in global employment, the details matter. In this guide, I’ll break down what early exercise really means, the benefits and potential risks for both you and your team, and what to consider when offering this option to employees abroad. So let’s jump straight in.

First, what does early exercise mean?

To put it simply, early exercise is buying shares that haven’t vested yet.

If you allow an employee to exercise early, it means they can purchase the shares you have offered them without having to wait for the end of their vesting schedule. In theory, they could receive stock options on day one of their employment, and pay the strike price to buy the shares on that same day.

However, it’s important to note that early exercise isn’t the same thing as accelerated vesting. While both of these concepts ensure employees do not have to wait until the regular end of their vesting schedule to buy shares, the comparison stops there.

Acceleration simply enables employees to vest faster, and typically happens when:

1. The company is being acquired (”single trigger”), or; 
2. the company is being acquired and the employee is being terminated as part of the acquisition (”double trigger”).
   
   

Why offer early exercise at all?

I have said many times that stock options are a great retention tool, because they come with a vesting schedule. Why, then, would you — as an employer — want to allow your employees to exercise early?

One advantage is that, depending on the type of equity you offer — and where you offer it — your employees might be eligible for tax advantages. For example, employees who early exercise incentive stock options (ISOs) may start their holding period earlier, potentially qualifying for long-term capital gains tax treatment down the line.

This can be a hugely attractive benefit, especially for key hires, making it a highly useful recruitment and retention tool.

However, If an employee exercises unvested options and then leaves, your company must track and manage the repurchase rights on unvested shares. This adds legal and administrative overhead and can create disputes or complications if not handled properly.

Learn more: Check out our dedicated equity incentives guide for startups

What your employees should consider

For employees, there are two different types of gains which are typically taxed with stock options:

1. When they exercise their stock options:

Often, the spread (the difference between the value of the shares at the time they exercise and the strike price) is taxed as salary income. And salary income is very often taxed at progressive income tax rates.

2. When they sell the shares:

Often, the difference between the price at which they sell the shares and their value when exercised is taxed as capital gains. Capital gains are usually taxed at a flat rate, which is usually lower than the rates applicable to salary income.

This, of course, depends on where your employees are based (some countries, for instance, do not have capital gains tax).

An example

On the whole, though, it’s usually beneficial for employees to exercise early.

For instance, say you have an employer, John, that earns $100,000 per year. John is taxed on income at progressive rates, starting at 10% and gradually going up to 50%. Capital gains are taxed at a fixed 10% rate.

On the basis of his yearly earnings, John’s salary is taxed at an average rate of 40%.

Scenario 1: John doesn’t exercise early

In 2024, John buys 100,000 shares valued at $5, against a strike price of $1.

Taxation at exercise: $400,000 (100,000 x ($5 - $1)) x 40% = $160,000

In 2025, he sells his 100,000 shares (now valued at $10 each).

Taxation at sale: $500,000 (100,000 x ($10 - $5)) x 10% = $50,000

Total taxes paid at exercise and sale = $210,000

Scenario 2: John exercises early

In 2024, John buys 100,000 shares on the same day he receives his stock options. He buys the shares at their current price of $1 each.

Taxation at exercise: (100,000 x ($1 - $1)) x 40% = $0

In 2025, John sells the 100,000 shares now valued at 10$ each.

Taxation at sale: (100,000 x (10$ - 1$)) x 10% = $90,000

Total tax amount paid with early exercise = $90,000

Other considerations

That said, the earlier your employee exercises, the less visibility they have on the company’s business prospects. If they wait until the end of their vesting schedule, they have more time to see how the company grows, and to assess whether they’ll eventually have an opportunity to sell their shares (for instance as part of a merger or acquisition).

How can Remote help?

Ultimately, there is no right or wrong answer to the “early exercise” question. Much depends on the tax rules in your — and your employees’ — country (or countries) as to whether it is beneficial or not.

What is important, though, is to work with an equity incentives partner that can advise and enable your business. Remote Equity makes it simple to offer and manage equity for your people, even if they’re based abroad or hired through an employer of record (EOR).

To learn more about how we can help guide you through the big decisions, and handle all the heavy legal lifting for you, speak to one of our friendly experts today.