Why early exercise matters to a first-time founder
Early exercise can start a holder’s ownership and, in some jurisdictions, affect the timing of tax or capital-gains treatment. It also requires paying for shares before their value is certain and may tie up cash in an illiquid company. Founders must explain the plan’s restrictions without presenting personal tax advice.
Examples of early exercise
An employee has an option over 10,000 shares at ₦100 each, vesting over four years. The plan permits early exercise, so they pay ₦1 million now and receive restricted shares. If they leave after one year, the company may repurchase the 7,500 unvested shares under the plan terms.
Common misunderstanding
Early exercise does not simply mean exercising an option before its expiry date; ordinary vested options can usually be exercised before expiry. The distinctive feature is buying shares before vesting is complete. It also does not remove vesting conditions, because the resulting shares may remain subject to repurchase or forfeiture.
When to use it
Consider offering it when a company’s shares have a low current value and the option plan, company law and shareholder arrangements support restricted shares. Document payment, vesting and repurchase mechanics carefully. Tax elections, filing deadlines and securities rules vary by jurisdiction, so both company and holder need qualified advice before acting.