when you exercise the esos you would have to pay the exercise price plus tax even if you do not sell the stock recall that exercise of esos is a taxable event in this case that amount equates to 50 000 plus 28 000 for a total of 78 000 if you immediately sell the stock at the prevailing price of 120 you receive proceeds of 120 000 from which you would have to subtract 78 000 the gain of 42 000 should be offset by the 35 000 decline in time value leaving you with 7 000 
image by sabrina jiang investopedia 2020early or premature exerciseas a way to reduce risk and lock in gains early or premature exercise of esos must be carefully considered since there is a large potential tax hit and big opportunity cost in the form of forfeited time value in this section we discuss the process of early exercise and explain financial objectives and risks 