I don't see how that is an issue. Exercising options is a form of income. Why not pay tax on income?

When you exercise startup options:

1. Usually there is no liquid market, so for lack of a better term, the valuation is made up.

2. Related to point one, with no liquid market, there is no option to sell the options the raise the money to pay the taxes.

3. There are often restrictions (e.g. lockup periods) that legally restrict you for selling from a specific period. You are forced to take on the risk that the stock doesn't crash, often with much less info or freedom than investors and execs.

In fact, in the US, normally startup options are ISOs (incentive stock options) so theoretically they are NOT taxed on exercise. The issue is that AMT (google it) actually nullifies that ISO tax benefit in most instances, and AMT only has stuck around because Congress can not function to deliver reasonable tax policy.

That's right.

The main issue with option is the lack of liquidity.

One may have to put down quite a bit of cash down in order to exercise, and that is a problem, even if in practice, it is usually good value for the option holder.

But most people either 1) do not have a lot of cash on hand, or 2) do not have the appetite to tie their hard-earned cash to anything illiquid-that-maybe-could-go-to-zero.

Executing options is completely voluntary and laws are public. Incurring this tax liability is voluntary so again, there is no problem.

The issue people have is that you're being taxed on an unrealized (as in not converted to cash) gain--which in general is not the case.

Exercising options is a form of income in theory. In practice these stocks very often go to zero, or a value lower than what you paid to exercise them.