It's my understanding that early exercise is mainly only useful for tax purposes. You still won't be a shareholder until at least 1 share vests, which for a new employee, likely won't be for a year. Is that incorrect?

Also, you’re prepurchashing common shares. These are only worth money if the sell price is over the valuation of the last raised round

that's the risk of investing in equity. The employee needs to come to terms with it - there's no situation where this risk can be mitigated (without someone else taking a hit).

Yes, you are right about that. This situation is slightly better with AMT bracket moving up with Trump tax changes. But the basics still apply.

I corrected by saying "vesting rules still apply". But the tax consequence (AMT or otherwise) will discourage one to exercise as the estimated stock price becomes bigger and bigger as the company grows.

If you do month 1: Strike price = $1. Pre-exercise, file 83-b with tax. Pay 0 AMT. You quit after 2 years, get to keep half the shares, company might pay you back the principal for the lost half (yes, there is a risk there)

If you do this 2 year when you quit, may be perceived value of stock is $10. Now you out-of-pocket cost = $1 + AMT tax on (income + $9). Moreover, you probably hate the company when you leave, so even more unlikely you will want to buy your options. I have friends who have lost $100k+ with that attitude.

These days, AMT cut off is much higher, but this could apply to some of the valley's sought after engineers.

It does depend on the cash you have on hand, though. If you can afford to pay that AMT, you'll get most of it back in credits over the following years. But I suspect many people wouldn't be able to cover that tax bill without selling those shares that they can't sell.