when you receive the esos at the time of grant you typically have no intrinsic value because the eso strike price or exercise price is equal to the stock s closing price on that day as your exercise price and the stock price are the same this is an at the money option 
once the stock begins to rise the option has intrinsic value which is intuitive to understand and easy to compute but a common mistake is not realizing the significance of time value even on the grant day and the opportunity cost of premature or early exercise in fact your esos have the highest time value at grant assuming that volatility does not spike soon after you acquire the options with such a large time value component as demonstrated above you actually have value that is at risk assuming you hold esos to buy 1 000 shares at an exercise price of 50 with volatility at 60 and 10 years to expiration the potential loss of time value is quite steep if the shares are unchanged at 50 in 10 years time you would lose 35 000 in time value and would be left with nothing to show for your esos this loss of time value should be factored in when computing your eventual return let s say the stock rises to 110 by expiration in 10 years time giving you an eso spread akin to intrinsic value of 60 per share or 60 000 in total however this should be offset by the 35 000 loss in time value that results from holding the esos to expiration leaving a net pre tax gain of just 25 000 unfortunately this loss of time value is not tax deductible which means that the ordinary income tax rate assumed at 40 would be applied to 60 000 and not 25 000 taking out 24 000 for compensation tax paid at exercise to your employer would leave you with 36 000 in after tax income but if you deduct the 35 000 lost in time value you would be left with just 1 000 in hand holding esos until expirationbefore we look at some of the issues surrounding early exercise not holding esos until expiration let s evaluate the outcome of holding esos until expiration in light of time value and tax costs the chart below shows the after tax net of time value gains and losses at expiration at a price of 120 upon expiration actual gains after subtracting time value are just 7 000 this is calculated as a spread of 70 per share or 70 000 in total less compensation tax of 28 000 leaving you with 42 000 from which you subtract 35 000 for time value lost for a net gain of 7 000 