There is a particular irony in being granted share options. On paper you have been handed something valuable. In practice, converting that paper into actual shares requires you to write a cheque, sometimes a very large one, before you have received a penny.
For senior employees at a company that has grown substantially since grant, the numbers can be startling. The strike price was set years ago when the company was worth a fraction of today’s valuation. The gap between that price and current value is the whole point — and it is also, in many cases, exactly what creates the tax charge.
Two Costs, Not One
The mistake people make is budgeting for the exercise price and forgetting what follows.
The strike price is what you pay the company to convert your options into shares. It is fixed at grant and does not change.
The tax depends on the scheme and the jurisdiction. With many non-tax-advantaged arrangements, the difference between what you pay and what the shares are worth on the day you exercise is treated as income at that moment — even though you have not sold anything and may not be able to. That charge can be due long before the shares can be turned into cash.
The combined figure regularly exceeds what people expect. And the timing is unforgiving: options typically expire if not exercised within a set window, and leavers often have a very short period — sometimes ninety days — to exercise or forfeit entirely.
The Trap in an Unlisted Company
If your employer is listed, there is usually a straightforward answer: exercise and sell enough shares to cover the cost, keep the rest. Many companies facilitate this directly.
If the company is private, that route may not exist. There may be no market for the shares, transfer restrictions in the articles, and no secondary sale permitted without board consent. You could face a real tax bill on a paper gain in an asset you cannot sell.
This is the situation that catches people leaving a private company. The options are valuable. The exercise window is short. The cash required is substantial. And the shares themselves cannot readily be turned into money to pay for any of it.
Borrowing Against the Shares You Are Acquiring
Where the shareholding is meaningful, one route is to borrow against the shares themselves rather than finding the cash from savings.
For listed shares this is well established. A facility secured against the position provides the capital to exercise and settle the tax, and is repaid later from a sale, a refinance, or other liquidity. The lending decision rests on the security and the repayment plan rather than on income multiples. Our stock loans pillar covers how these facilities are structured.
For unlisted shares it is more involved but not impossible. Lenders assess the company, the shareholding, any transfer restrictions and the credibility of a future liquidity event. Loan-to-values are lower and the field of lenders is narrower. Our unlisted stock loans page sets out what is achievable.
Where a company is heading towards a flotation, a facility can be structured with the listing itself as the anticipated exit — see our pre-IPO loans page.
Restrictions That Affect What You Can Do
Several constraints commonly apply to the shares you receive, and they matter to a lender as much as to you.
Lock-up periods following a flotation typically prevent sale for a defined period. A facility written with a sale exit inside that window is a problem waiting to happen.
Insider dealing rules and closed periods restrict when directors and certain employees can transact. Pledging shares as collateral may also require notification, and in some cases board or company approval.
Company transfer restrictions in the articles or shareholders’ agreement may require consent before shares are pledged, or grant pre-emption rights to existing holders.
US resale restrictions apply where the shares are subject to Rule 144, which affects both volume and timing of sales. Our Rule 144 restricted stock loans page covers financing against that stock.
Establish all of this before committing to a structure. A lender will discover it during diligence in any case, and finding out late costs time you may not have if an exercise window is closing.
Deciding How Much to Exercise
It does not have to be all or nothing, and this is worth thinking about carefully.
Exercising everything maximises your position if the company performs, but concentrates a large amount of your net worth in a single asset — often the same company that pays your salary, which is a genuine double exposure.
Exercising partially reduces the immediate cash requirement and the concentration risk, at the cost of some upside. Where options expire in tranches, staging the exercise across tax years can also matter.
If you do end up holding a large concentrated position, that brings its own considerations, which our post on diversifying a concentrated share portfolio explores.
Frequently Asked Questions
Can I borrow against options I have not yet exercised?
Generally no. Unexercised options are a contractual right rather than an asset a lender can take security over. Financing usually becomes available once the shares themselves are in your name, which is why the exercise and the funding are typically arranged to complete together.
What if my company is private with no market for the shares?
It is harder but not always impossible. Lenders will look at the company’s performance, any recent funding round valuation, and whether a liquidity event is realistically in prospect. Expect a lower advance and more diligence than on listed stock.
How quickly can this be arranged?
Where the shares are listed and unrestricted, indicative terms are typically available within a day or two. Unlisted shares take longer because the diligence is more involved. If you have a short exercise window, start early.
Should I just let the options lapse if I cannot afford to exercise?
That is a real decision and sometimes the right one, particularly if the strike price is close to current value. But letting genuinely valuable options lapse for want of short-term cash is an expensive way to solve a liquidity problem, which is precisely the gap this kind of facility fills.
Note that tax treatment of share options depends on the scheme, your residence and rules that change; your accountant or tax adviser should confirm your position before you act. We arrange the funding side once that picture is clear.
You can see the full range of securities-backed facilities we arrange on our homepage, browse our finance guides, or contact our team to discuss an exercise window.