Exercise Financing Break-Even Calculator
Non-recourse lenders will pay your strike price and your tax bill in exchange for interest and a share of the upside. Whether that is a lifeline or an expensive mistake depends on the exit price — and the honest comparison is not against paying cash, but against doing nothing at all.
Tax year 2026 Figures final Last verified 2026-07-27 How we verify
Exercise Financing Break-Even Calculator
Result
| Financing beats doing nothing | No — waiting is better here |
|---|---|
| Paying cash beats doing nothing | Yes |
| Exit price where cash starts to win | $4.63 |
| Exit price where financing starts to lose | $1.57 |
| What the financing costs you | $125,486 |
| Cash needed today to do it yourself | $37,840 |
| Lost if the company fails — paying cash | $37,840 |
| Lost if the company fails — financed | $0 |
| What the lender takes at exit | $171,481 |
| AMT credit released by the sale | $3,960 |
| Net per share, paying cash | $21.9003 |
Estimates for the tax year shown, on the assumptions set out under what this does not model. Educational information, not tax advice.
Line by line
| Spread if you exercise today | $100,000 |
|---|---|
| Strike price cost | $20,000 |
| Tax triggered by exercising today | $17,840 |
| Cash needed today | $37,840 |
| Minimum tax credit created | $17,840 |
| Amount the lender advances | $37,840 |
| Origination fee | $0 |
| Interest accrued to the exit | $13,641 |
| Lender’s share of the appreciation | $120,000 |
| Total the lender takes | $171,481 |
| Gross proceeds at exit | $600,000 |
| Tax at exit if you hold the shares | $119,960 |
| Less minimum tax credit released | $3,960 |
| Net — paying cash | $438,005 |
| Net — financed | $312,519 |
| Net — waiting | $378,134 |
A vested option at a private company is worth nothing until you exercise it, and exercising costs money — the strike price, plus a tax bill on a gain you cannot sell anything to pay. For a large grant at a company that has raised a few rounds, that total routinely runs past six figures. A whole industry exists to lend against it.
The deal is always the same shape. A non-recourse lender pays your strike price and usually your taxes. At an exit they take back what they advanced, with interest, plus a share of the appreciation. If the company fails you owe nothing at all — they lose their money, not you. That last part is real and it is worth something. The question is how much.
The comparison most people make is financing against paying cash, which is the wrong one: someone considering a loan usually does not have the cash. The comparison that decides it is financing against doing nothing — waiting until there is a market, then exercising and selling on the same day. That path costs no money, risks no money, and converts the whole spread into ordinary income. It is what you will do otherwise, and financing has to beat it.
This assumes waiting is available to you. It usually is not if you leave. A standard grant gives you ninety days after termination to exercise or forfeit, so for someone who has already resigned the real choice is between financing and losing the options outright — and against that, terms that look extortionate here can still be worth taking. Check your grant’s post-termination exercise window before treating the waiting column as an option.
Background reading: What happens to your options when you leave.
How this is calculated
Three paths, each measured the same way: how much better off you are at the exit than you are today.
-
Paying cash
proceeds − tax at exit + credit released − (strike + tax today) × (1 + your return)ʸThe last term is what the money would have done elsewhere. Leaving it out makes cash look free, which is the most common error in a comparison like this. -
Financing
proceeds − tax at exit + credit released − what the lender takesThe tax is identical to the cash path, because you own the shares either way. You are taxed on the whole gain including the part that goes to the lender. -
What the lender takes
min( advance × (1 + rate)ʸ + share × appreciation , the shares are worth )The minimum is the non-recourse promise, and it is the entire product. Above it the terms are expensive; below it they are free. -
Waiting
proceeds − strike − ordinary tax on the whole spreadNo outlay, no risk, no long-term capital gain. For ISOs a same-day sale is a disqualifying disposition, which is taxed as compensation but escapes Social Security and Medicare under §3121(a)(22). -
The implied cost
(what the lender takes ÷ what they advanced)^(1/y) − 1The single most useful number here. It restates interest plus participation as one annual rate, which is the only way to compare an offer against anything else you could borrow.
A worked example
Maya holds 20,000 vested incentive stock options at a $1.00 strike. The 409A is $6.00, she earns $200,000, and she thinks an exit is four years away at around $30.00 a share. Exercising today costs $20,000 of strike and $17,840 of alternative minimum tax — $37,840 she does not have.
A lender offers to fund all of it at 8% a year plus 25% of the appreciation above today’s valuation. The 8% sounds reasonable. Over four years the advance grows to $51,481, which is indeed 8% compounding. Then the participation lands: 25% of the $480,000 the shares gained above $6.00 is $120,000. The lender takes $171,481 against the $37,840 they put in — an implied cost of 45.9% a year.
Set against paying cash, financing costs her $125,486. Set against the thing she would otherwise have done — waiting, exercising at exit and selling the same day — it is worse still. Waiting nets $378,134. Financing nets $312,519. Doing nothing at all beats the loan by $65,615.
Paying cash, if she could, nets $438,005 and genuinely is the best path here: the long-term rate on $580,000 of gain beats ordinary rates by far more than the $37,840 outlay costs her. The tax logic for exercising early is sound. It is the financing that destroys it — and note that only $3,960 of her $17,840 AMT credit comes back in the exit year, because §53(c) rations that too.
| Spread At Exercise | $100,000.00 |
|---|---|
| Tax At Exercise | $17,840.00 |
| Cash Needed Today | $37,840.00 |
| Amt Credit From Exercise | $17,840.00 |
| Tax At Exit If You Hold | $119,960.00 |
| Amt Credit Recovered At Exit | $3,960.00 |
| Interest Accrued | $13,640.90 |
| Lender Participation | $120,000.00 |
| Lender Takes At Exit | $171,480.90 |
| Net If You Pay Cash | $438,005.24 |
| Net If You Finance | $312,519.10 |
| Net If You Wait | $378,133.75 |
| Cost Of Financing | $125,486.15 |
| Cash Beats Waiting | true |
| Financing Beats Waiting | false |
| Break Even Exit Price | $4.63 |
| Financed Break Even Exit Price | $1.57 |
Every figure here is produced by the module the calculator runs, asserted on each build against a case whose arithmetic was worked by hand from the bracket tables.
What this does not model
Every calculator has a boundary. Here is where this one stops — read it before relying on the number.
- The exit price is a guess and it drives everything. The three paths reorder completely across the range: financing wins at low outcomes, waiting wins at high ones, and cash wins nearly everywhere if you have it. Run a pessimistic figure before treating any of this as advice.
- Real financing agreements are more varied than the three terms modelled here. Participation may be measured from the strike rather than the current valuation, capped, tiered by outcome, or structured as a prepaid forward rather than a loan. Read the actual documents — the shape of the participation clause matters more than the interest rate.
- The tax treatment of the advance is modelled as a straightforward loan: you own the shares, you are taxed on the whole gain, and you repay the lender out of the proceeds. Some structures are drafted as prepaid variable forward contracts with materially different treatment, and the distinction is genuinely unsettled in places.
- AMT credit recovered between exercise and exit is ignored — only the credit released in the exit year is counted. This understates the cash and financed paths equally, which means it understates the case for exercising early. The AMT credit calculator models the full multi-year recovery.
- Salary is held flat and every year is priced against the 2026 brackets. Both are indexed annually, so a projection several years out is a shape rather than a forecast.
- The ISO paths assume a qualifying disposition at exit: more than two years from grant and more than one from exercise. The calculator requires at least a year to the exit for that reason. A sale sooner is a disqualifying disposition, which the tender offer calculator handles.
- State tax is a single flat rate applied to ordinary income and capital gains alike, and no state alternative minimum tax is modelled. California has its own, at 7%, and it applies to ISO exercises.
- Nothing here prices the concentration risk of holding a single private company’s stock, or the possibility that the exit is a structured deal, an acqui-hire, or a recapitalisation that wipes out common shareholders. Those outcomes are why the non-recourse feature exists.
Questions
Is non-recourse financing ever the right answer?
Yes, in two situations. The first is when waiting is not available — you have left or are leaving, and the ninety-day post-termination window means the choice is between financing and forfeiting the options entirely. Against zero, almost any terms win.
The second is when you genuinely cannot bear the downside. The calculator shows what the cash payer loses if the company fails and what the financed holder loses, and the gap between those two figures is what you are buying. If losing the cash outlay would be materially damaging to you, paying a lot for that protection can be entirely rational even when the expected value is against you. That is what insurance is.
Why is the implied cost so much higher than the interest rate?
Because the interest rate is charged on what was advanced and the participation is charged on the outcome, and at a good outcome those are wildly different numbers. Advancing $37,840 and taking 25% of $480,000 of appreciation is $120,000 of the total cost against $13,641 of actual interest.
The implied annual cost restates the whole package as one rate so it can be compared with anything else. Set the participation to zero and it returns exactly the quoted interest rate, which is how you can tell the figure is doing what it claims.
Do I still pay tax on the part the lender takes?
Under the loan treatment modelled here, yes. You own the shares, you realise the whole gain, and you repay the lender out of what is left. There is no deduction for the participation — it is a cost of borrowing against an investment, not a reduction of your gain.
This is the part that surprises people at the exit, and it can create a genuine cash squeeze: tax on a gain, a large repayment, and only the remainder for you. Some structures are drafted specifically to avoid it, which is one reason to have the documents reviewed by someone who is not the lender.
Why does waiting beat exercising early at some prices and lose at others?
Because early exercise trades a certain cost today for a rate difference later. You pay the strike and the tax now, and in exchange the appreciation from here to the exit is taxed at long-term capital gains rates instead of ordinary rates — a spread of roughly seventeen points federal at high incomes.
At a low exit there is little appreciation to save on and the outlay dominates, so waiting wins. At a high exit the rate difference dominates and exercising wins. The break-even exit price above is exactly where those two cross, and it is usually far lower than people expect.
What happens if my company never exits?
The cash payer is out the whole outlay indefinitely, with no loss to deduct until there is a disposition or the stock becomes demonstrably worthless. The financed holder owes nothing and waits, though interest and participation continue to accrue against whatever eventually happens.
Most of these agreements have a term — often eight to ten years — after which something has to happen. What that something is varies a great deal between lenders and is worth understanding before signing, because it is the scenario most likely to actually occur.
Could I exercise only part of my grant instead?
Almost always the better first move, and it is not modelled here because the calculator prices a single decision. Exercising up to the point where alternative minimum tax begins costs the strike price and nothing else — the ISO calculator computes that threshold directly.
A partial exercise funded with cash you already have, repeated across several tax years, achieves much of what financing does at none of the cost. The case for a large financed exercise rests on an expiring window or an imminent exit, not on the tax alone.
Does the 409A value or the exit price set what the lender takes?
In the structure modelled here, both: interest accrues on what was advanced, and the participation is a share of the gain measured from today’s 409A value up to the exit price. That reference point matters enormously and is negotiable.
A lender measuring participation from your strike price rather than the current valuation is taking a share of gain that had already accrued before they were involved. Check which one your term sheet says, because the two can differ by a very large amount on a grant that is already well in the money.
Is anything I enter here sent anywhere?
No. The calculation runs entirely in your browser as a static JavaScript module with no network request. Your grant size, your strike price, your salary and your view of the exit never leave your device, nothing is stored between visits, and there is no account or email gate on the result.
Sources
Every rate and threshold used above traces to one of these. We cite the statute, the regulation, or the IRS directly — never another commentary site.
- IRC §55 and §56(b)(3) — alternative minimum tax and the AMT basis of ISO stock
- IRC §53 — credit for prior year minimum tax liability
- IRC §422 — incentive stock options and the holding period conditions
- IRC §421(b) — disqualifying dispositions of statutory option stock
- IRC §3121(a)(22) — statutory option stock excluded from FICA wages
- Treas. Reg. §1.83-7 — taxation of non-qualified stock options
- IRC §1211(b) — limitation on capital losses
- Rev. Proc. 2025-32 — 2026 brackets, standard deduction and AMT figures
- Rev. Proc. 2025-32 (2026 inflation adjustments) — §2.15
- Rev. Proc. 2025-32 (2026 inflation adjustments) — §2.01
- Rev. Proc. 2025-32 (2026 inflation adjustments) — §2.13
- 26 U.S.C. §55 — Alternative minimum tax imposed
- P.L. 119-21 (OBBBA) §70107 — AMT exemption phaseout thresholds and rate
- Rev. Proc. 2025-32 (2026 inflation adjustments) — §2.03
- 26 U.S.C. §1411 — Net investment income tax (statutory, not indexed)
- IRS Topic no. 751 — Social Security and Medicare withholding rates
- SSA 2026 COLA fact sheet — Social Security taxable wage base
This page is educational information, not tax, legal or investment advice, and using it creates no professional relationship. Equity compensation interacts with the rest of your return in ways a single calculator cannot see. Before acting on a figure of any size, take it to a qualified tax adviser.