when an eso is granted it has a hypothetical value that because it is an at the money option is pure time value this time value decays at a rate known as theta which is a square root function of the time remaining 
assume you hold esos that are worth 35 000 upon grant as discussed in the earlier sections you believe in the long term prospects of your company and plan to hold your esos until expiration below shows the value composition intrinsic value plus time value for itm otm and atm options value composition for in out and at the money eso option with strike of 50 prices in thousands image by sabrina jiang investopedia 2020even if you begin to gain intrinsic value as the price of the underlying stock rises you will be shedding time value along the way although not proportionately for example for an ito eso with a 50 exercise price and a stock price of 75 there will be less time value and more intrinsic value for more value overall the otm options bottom set of bars show only pure time value of 17 500 while the atm options have time value of 35 000 the further out of the money that an option is the less time value it has because the odds of it becoming profitable are increasingly slim as an option gets more in the money and acquires more intrinsic value this forms a greater proportion of the total option value in fact for a deeply in the money option time value is an insignificant component of its value compared with intrinsic value when intrinsic value becomes value at risk many option holders look to lock in all or part of this gain but in doing so they not only give up time value but also incur a hefty tax bill we cannot emphasize this point enough the biggest downside of premature exercise is the big tax event it induces and the loss of time value you are taxed at ordinary income tax rates on the eso spread or intrinsic value gain at rates as high as 40 