And if you leave the company they actually cost you money, since you have to pay out of pocket to exercise them (for stock that may end up never being sellable) and you also have to pay AMT taxes based on the latest company valuation.

Can't stress this enough. If you have Employee Incentive Options is way better to exercise them as soon as they are vested than to wait (if thinking of exercising at all). When you exercise them you pay AMT on what they are worth when exercised (of course the "fair price" is a hidden secret left for the CFO). As time passes, the "fair price" is probably going to keep increasing, but with no liquidity and inability to sell your options you are stuck with the AMT with the fair price at the moment of exercise

Don't wait until they vest. Do it as soon as they're assigned to you. Avoid the AMT completely.

Which is a risk, especially in companies where the strike price is close to $100/share. If it's going to be in the $10k+ range, is it really worth it to potentially reduce your future tax burden? Maybe. But it's also possible that your shares aren't worth that exercise price. Speaking only for myself, in my experience I decided to wait to see if the price was ever justified before buying the shares, and if it means a higher tax, then so be it. Otherwise, if it means walking away from vested, unpurchased shares, so be it.

Yep. Just because you CAN early exercise does not mean you can afford to do so. I was fortunate because I was able to early exercise shortly after grant but when I knew the company was going public. Had to borrow some money to do so, but the couple hundred I probably paid in interest was more than made up for in the tens of thousands I saved in income taxes. It takes the right scenario, to be sure. At the time I had no mortgage interest deduction so I could afford a double-digit paper AMT gain; I was still only subject to normal income taxes. In theory when you leave the company, if it has not gone public, you get paid back the money you put in. In practice, if it goes out of business, you just lost all of the money you put in.

I don't think the strike price is really important, it's the exercise amount that matters. But there's certainly an element of risk, and saving money on taxes is nice, but not losing money is nice too.

Yes it is a risk, and it's worth careful thought. Mainly I just wanted to make the point that you don't have to wait until they vest. A lot of people don't realize that.

This advice could be risky. If they assign stock to you and you exercise it and there is any different between the current value and your strike price, that can be exactly what triggers the AMT.

If you exercise and sell at the same time, you will pay short-term income taxes, but without any AMT to worry about.

When the stock is assigned to you then there should be no difference between the current value and your strike price. That would be very unusual. That is why I was saying that waiting until you vest might not be a good idea because by then you might have an AMT issue.

I agree that exercising and selling can be a good strategy but we're (mostly) talking about private companies here where that may not be an option due to a lack of liquidity.

It should be noted that the choice to allow "early exercise" is made by the company granting the options. While it might be a good tax strategy, you do not (to the best of my knowledge) have any guaranteed right to be allowed to exercise your options until they vest:

http://www.startupcompanylawyer.com/2009/01/11/should-a-comp...

This is correct. But most of the time if you ask you can get it.

That's an expensive lottery ticket. I used to do that, but on my 3rd startup now and yet to see anything. I could have bought a new car with what options I've converted.

Not all illiquid assets are worthless. It's specifically the combination of being prohibited from selling and no prospects for ever receiving a dividend that make these shares worthless. In fact, a share you cannot sell but does pay dividends is very similar to the kind of revenue- or profit-sharing arrangements the author suggests.

It's the norm for share options. You can't sell them or even in many cases keep them after you quit the company. It's a very circumscribed deal.

"Everyone else does it this way" isn't a good enough reason for me.