You have 10,000 ISOs you exercised two years ago at $1 per share. The company just agreed to be acquired for $15 per share. The deal closes in 90 days. You’re trying to figure out whether you’ll owe AMT on the $140,000 gain this year even though the payout is structured as 80% at close and 20% held in escrow for 18 months.

Or maybe you have 5,000 vested NSOs with a $3 strike price. Acquisition price is $12 per share. Your payout letter says you’ll receive $45,000 minus “applicable withholding.” You’re staring at a number that’s 35% lower than you calculated and trying to figure out if the company made a mistake.

Here is the deal. The gap between “we got acquired” and “I have money in my account” is where people make expensive mistakes. With acquisition activity picking up after two years of drought, employees who joined startups in 2021–2022 are finally facing their first liquidity event. The mechanics are invisible until the moment you’re filling out a payout election form with a 48-hour deadline.

Why the Timeline Matters More Than the Price

The acquisition announcement is not a taxable event. Neither is signing the definitive agreement. The taxable event happens at closing, typically 90 days after signing, when your vested options convert to cash equal to the acquisition price minus your strike price.

That spread is what you actually receive. If the company is acquired for $20 per share and your strike price is $5, you get $15 per share, not $20.

The cash does not arrive the day the deal closes. Payouts typically hit your account about two weeks after closing. But here is the part that catches people: 80% of your spread arrives immediately. The other 20% sits in escrow for 12 to 24 months to cover indemnification claims if the buyer discovers problems with the company’s reps and warranties.

You owe taxes on 100% of the spread in the year the deal closes, even though you only have access to 80% of the cash.

Hypothetical example:

The deal closes in December 2025. You receive 80% of your spread in late December. The remaining 20% pays out in June 2027. Your entire tax bill is due April 15, 2026, based on the full spread, not just the 80% you received.

The escrow can also get clawed back if the buyer files an indemnification claim. If that happens, you have to return the money but you do not get a refund on the taxes you already paid on it.

How Vested Options Actually Get Cashed Out

If you already exercised your options before the acquisition, the process is straightforward. The acquirer pays you the spread. You receive the acquisition price minus the strike price you already paid.

If you have vested options you have not exercised yet, most companies allow a cashless exercise at closing. The company exercises the options on your behalf, uses part of the proceeds to cover the strike price, withholds taxes if they are NSOs, and sends you the net cash.

“Acquired for $20 per share” does not mean you get $20 per option. It means you get $20 minus your strike price, minus withholding if applicable, minus the 20% that goes into escrow.

Here is what that looks like side by side for ISOs and NSOs with the same acquisition terms:

  • ISO: 10,000 shares exercised at $1 and sold at $15. Gross proceeds were $150,000. Gain was $140,000. No upfront withholding applied. Net cash received was $120,000 upfront plus $28,000 in escrow later. Estimated tax owed later was about $28,000 in long-term capital gains tax.

  • NSO: 5,000 shares exercised at $3 and sold at $12. Gross proceeds were $60,000. Gain was $45,000. Estimated withholding was about $15,750. Net cash received was about $29,250 upfront. Additional tax owed later could be about $17,000 beyond withholding.

The ISO holder receives the full spread upfront (minus escrow) because ISOs are taxed as capital gains, not wages. No withholding happens at payout.

The NSO holder receives 65% of the spread because NSOs are taxed as ordinary income and the company must withhold federal, state, and FICA taxes before sending the cash.

The Withholding Surprise on NSOs

NSO spreads are taxed like wages, not capital gains. That means the company withholds taxes before the cash hits your account, and the number on your payout letter is already net of that withholding.

This is why the payout can look much smaller than the gross spread you calculated. If your spread is $45,000, you are not receiving the full $45,000 in cash. Part of it is withheld and sent to the IRS and state tax authorities first.

The other catch is that withholding does not always equal your final tax bill. If you are in a higher bracket or live in a high tax state, you may still owe more when you file. If too much was withheld, you may get a refund later.

What Happens to Unvested Options

Unvested options do not automatically pay out just because the company is acquired. What happens depends on the terms of your grant and the structure of the deal.

In some cases, unvested options accelerate and become payable. In others, they are assumed by the buyer and continue vesting on a new schedule. In others, they are canceled with no payout at all.

That is why two employees at the same company can have very different outcomes in the same exit. The acquisition price matters, but the grant terms matter too.

Pitfalls

Missing the payout election deadline is one of the easiest ways to lose control of the process. These forms often come with a short turnaround, and if you miss the deadline, the company may default you into its standard payout treatment.

Assuming your NSO payout equals the full spread is another common mistake. NSOs are taxed like wages, so withholding happens before you receive the cash. The amount that lands in your account can be much lower than the gross number in your head.

Treating escrow like extra money you can think about later is risky. The escrow is usually taxable in the year of closing, even though you do not receive that cash until much later. If you spend the upfront payout without planning for the full tax bill, the surprise shows up at filing time.

Assuming unvested options will pay out is also risky. Some do. Some do not. The outcome depends on the grant terms and the deal structure, not just the fact that the company got acquired.

Worth Looking Into

Option Type And Grant Terms: Check your original grant agreement and offer letter to confirm whether your options are ISOs or NSOs and whether any acceleration clauses apply. That affects how unvested options are treated and whether withholding happens at payout.

Escrow Terms: Check how much of your spread will be held in escrow and how long it will stay there. The payout letter usually spells this out. If the deal has not closed yet, HR or the acquisition documents may have the answer.

Your Full Tax Bill: Estimate your total tax bill for the year of closing, including the option spread, your regular salary, and any other income. NSO withholding may not fully cover what you owe, especially if you are in a higher bracket or live in a high tax state.

Any AMT Carryforward: Confirm whether you have any AMT carryforward from prior ISO exercises. If you exercised a large number of ISOs in earlier years, you may have an AMT credit that can reduce your tax bill in the year of the exit.

Cash to Set Aside For Taxes: Set aside enough from your upfront payout to cover taxes. A rough starting point is at least 40% for NSOs and at least 30% for ISOs. Escrow is generally taxable in the year of closing even though that part of the cash arrives later.

Final Thoughts

A startup exit can look simple from the outside. The headline says the company got acquired, the price sounds great, and everyone assumes the money just shows up. In reality, the outcome usually depends on a few details that are easy to miss until the payout letter is in front of you.

The type of options you have, whether you already exercised, how much is held in escrow, and how your grant handles unvested equity can all change what actually lands in your account. The price per share matters, but the structure around the payout often matters just as much.

That is why it helps to slow down before treating the exit number like spendable cash. A deal can create liquidity, but it can also create withholding, tax timing issues, and surprises around unvested options that make the final result look very different from the headline number.

Have you gone through a startup acquisition or tried to make sense of an option payout? Drop your comments below and share what caught you off guard, or what you wish you had understood earlier.

Disclaimer: This is educational content from Silly Money, not tax, legal, or investment advice. Taxes are complicated and your situation is unique. Talk to a qualified professional before making decisions based on anything you read here.