How to Pay for Exercising ISOs or NSOs: A Guide to Your Funding Options

Exercising stock options can be one of the most exciting—and stressful—financial decisions you’ll make. Done right, it can unlock life-changing wealth. Done wrong, it can create tax surprises, liquidity crunches, and unnecessary risk. 

The challenge? Exercising requires cash—sometimes a lot of it—to cover the strike price, taxes, and fees. And if you’re facing a deadline or juggling other financial priorities, the pressure can feel overwhelming. 

The good news: You have options. Below, we’ll break down common strategies for funding an ISO or NSO exercise in plain language, highlight when each might make sense, and share how Plancorp helps clients navigate these decisions with clarity and confidence. 

First, Understand What You’re Paying For 

Before you choose a funding strategy, know what’s driving the cost: 

Strike Price: The amount you pay per share to convert your option into stock. 

Taxes: 

• NSOs: Ordinary income and payroll taxes are due at exercise. 

• ISOs: No withholding, but the spread between exercise price and fair market value can trigger Alternative Minimum Tax (AMT). 

Fees: Depending on your employer or platform, transaction costs may apply. 

These costs vary widely based on your company’s valuation, grant size, and timing. That’s why planning ahead matters. 

Why Funding Can Be Hard 

Even high earners struggle with liquidity for option exercises. Common hurdles include: 

• Tight deadlines: Options often expire 10 years after grant, and if you leave your company, you may have only 90 days to act. 

• High valuations: The more your company grows, the more expensive the exercise. 

• Cash flow mismatch: Equity builds faster than savings. 

• Concentration risk: Exercising increases exposure to one company. 

Bottom line: This is complex. And the stakes are high. Let’s walk through the most common ways to fund an exercise, with props, cons, and when they might fit your goals. 

Funding Method #1: Cash Exercise (Using Your Own Savings)  

The simplest approach is using cash from a bank account or brokerage account to pay for the exercise.  

How it works:  

You pay the strike price (and taxes, when applicable) out of pocket and take full ownership of the shares.  

When it’s ideal:  

• You have ample savings 

• You want to preserve the tax benefits of ISOs  

• You believe strongly in the company’s long-term upside 

Funding Method #2: Sell-to-Cover (Cashless) 

A sell-to-cover is one of the most common approaches for NSOs—and sometimes ISOs. It’s important to note that this method is only available for publicly traded shares. 

How it works:  

Your employer sells enough shares to cover the taxes and fees, and you keep the remaining shares. 

Funding Method #3: Exercise and Sell (Same-Day Sale, Cashless)  

Your employer sells enough shares to cover the taxes and fees, and you keep the remaining shares. 

How it works:  

You exercise the shares and immediately sell all of them.  

Funding Method #4: Cashless Exercise Through a Liquidity Event  

Some companies allow option holders to exercise at the moment of IPO, acquisition, or tender offer.  

How it works:  

Instead of paying cash upfront, your exercise is bundled into the liquidity event. Proceeds cover the exercise and taxes, and you receive the net.  

Funding Method #5: Stock Swaps  

A stock swap lets you exchange existing company shares to pay for new shares you’re exercising.  

How it works:  

If you already own employer stock (e.g., from a prior exercise), you can “swap” enough of those shares—based on current market value—to cover the exercise cost. You’ll still need cash to cover taxes in many cases.  

Funding Method #6: Company-Facilitated Loans or Promissory Notes  

Some private companies lend money to employees to help them exercise.  

How it works:  

You borrow from your employer and pledge future shares as collateral.  

Major risks:  

• Loan repayment obligations remain even if the company’s value declines  

• Potential loss of ISO tax advantages  

This method is most common in start-ups or maturing private companies, when employees are very confident in future liquidity. 

Funding Method #7: Third-Party Option-Exercise Financing (OEF)  

Specialized lenders offer loans or share-back arrangements for employees who expect a future liquidity event.  

What these lenders provide:  

• Full-recourse loans: You are personally responsible for repayment.  

• Non-recourse loans: The lender takes on downside risk but typically keeps a portion of the upside.  

• Share-back loans: You give up a percentage of future shares in exchange for cash today.  

Key considerations:  

• High interest rates or share give-ups  

• Contract complexity  

• Impact on net future gains  

• Requires sharing company information with the lender  

When it may be appropriate:  

• You have large grants  

• The company may IPO or be acquired soon  

• You want to preserve ISO holding periods without using personal liquidity  

Funding Method #8: Using Other Assets or a Line of Credit  

If your overall balance sheet is strong, you may be able to borrow against other assets.  

Common options:  

• HELOC (Home Equity Line of Credit)  

• Securities-Backed Line of Credit (SBLOC) or margin loan  

• Personal loan or family loan (less common, higher interpersonal risk)  

Decision Framework: How to Choose the Right Funding Strategy  

Because the stakes are high, choosing the right strategy requires a thoughtful, personalized approach. Key considerations include:  

• How concentrated would you be after exercising?  

• What’s the expected timeline to liquidity—IPO, acquisition, or secondary market?  

• How likely is AMT if you exercise ISOs?  

• Do you have competing financial priorities (retirement, buying a home, childcare)?  

• What’s your conviction in the company’s long-term growth?  

Modeling tax outcomes, evaluating risk tolerance, and stress-testing scenarios can help clarify the best path.  

Special Considerations for ISOs  

ISOs offer compelling tax advantages—but only if handled correctly.  

You must hold ISO shares two years from the grant date and one year from exercise to qualify for favorable long-term capital gains treatment.  

Certain financing methods—such as selling shares at exercise, using a cashless exercise, or taking a full-recourse loan—can unintentionally disqualify ISO treatment.  

AMT is also a major factor. Triggering AMT at exercise can be beneficial long-term, but only if you understand the implications and potential AMT credit timeline.  

Special Considerations for NSOs  

NSO exercises are simpler but often more expensive upfront because ordinary income tax is due immediately.  

Key factors to watch:  

• Employer withholding may be insufficient (especially for high-income earners).  

• Large exercises can create underpayment penalties if not managed proactively.  

• NSOs are typically better candidates for cashless strategies, since there’s no special tax treatment to preserve.  

How Plancorp Helps Clients Evaluate Exercise & Funding Strategies  

Exercising stock options is both a financial and emotional decision. At Plancorp, we help clients:  

• Integrate equity compensation decisions into a full financial plan  

• Model AMT, income tax, and long-term capital gains scenarios  

• Stress-test liquidity, risk exposure, and future value potential  

• Evaluate loans, swaps, and financing with an unbiased, fiduciary perspective  

• Coordinate with accountants, attorneys, and employer plan administrators  

• Make decisions that support both long-term goals and short-term cash flow needs  

Our goal is to help you unlock the value of your equity compensation, without letting taxes, deadlines, or liquidity constraints get in the way.  

Final Thoughts 

Funding an ISO or NSO exercise doesn’t have to feel overwhelming. Whether you have ample liquidity or are exploring alternatives, the key is understanding your options, the tax implications, and how each decision impacts your long-term financial picture.  

If you’re facing an exercise deadline—or just want clarity on the best path forward—let’s talk. A 30-minute private strategy session with a Plancorp wealth advisor can help you make confident decisions and avoid costly mistakes.