This article reviews the tax effects of early-exercise incentive stock options and compares the tax results to those of early-exercise nonqualified stock options. When they exercise their options after the IPO or as part of the acquisition, selling the stock at the same time, a large chunk of their proceeds goes to pay federal and state taxes.

Pre-IPO - Early-Exercise Options -

This article looks at ways to reduce this tax burden. It has become even more confusing with a twist at pre-IPO companies that allows you to exercise options immediately upon grant.

These issues, however, should not scare you from taking advantage of them when you know how to maximize their value. The IRS regulations on ISOs increase risk in early-exercise options, making it crucial that you understand the tax treatment. Why do some companies grant stock options that are immediately exercisable before they vest and are subject to a repurchase right by the company? This is done mostly by startup and private companies.

Early Exercisable Stock Options: What You Need to Know

Early-exercise stock options allow you to exercise when the stock price is low and then start your capital gains holding period. The risk is that Is a Section 83 b election required when you receive a grant of stock or options in a privately held company? A common misunderstanding is that a Section 83 b election is required for grants in private companies or is available for any grants.

A Section 83 b election is available only when Is a Section 83 b election that taxes you on the value of the stock option spread at early exercise vesting required for resale ever revocable or rescinded?

What Are Stock Options?

The Section 83 b election is irrevocable unless you show a When should I prefer to immediately exercise an option into stock that is still subject to vesting and a company repurchase right? What is the risk? Early exercise gives employees who can pay the exercise price the opportunity to start their capital gains holding period early. If your plan permits this strategy, it makes sense in certain situations, such as My company allows me to exercise my ISOs early and receive stock subject to a company repurchase right during the vesting schedule.

Does my early exercise before vesting affect the calculations for AMT or disqualifying dispositions? Generally, stock options are exercisable when they vest.

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Should I make a Section 83 b election for my restricted stock grant? Before you even analyze the decision, you should learn the basic facts and risks of the Section 83 b election. Once you understand it, the election can make sense in certain circumstances, including Can my company help me file my Section 83 b election?

Can I exercise my options before they are vested and make a timely Section 83 b election to be taxed on the spread at that point? Generally, stock options are exercisable only when they vest. Second of all, most likely all your options will stay exactly the same. So, kick back! And use the opportunity to do some learning and planning, so that you can do not just something but the right thing after the lockup period expires. Going IPO might make you immediately think of making tons of money.

But the first thought that pops into my head is that now you can make any money. That is, some day after your company IPOs.

Once your company goes IPO, it means you can sell that stock for actual money. I think that is Pretty Awesome.

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Your company going IPO also means that the risk of exercising options is a lot lower. That knowledge means you can make a much better-informed decision about exercising your options and selling the resulting stock. And now additionally you know how much money you can get, right now, for selling a share of the stock!

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More things you could be doing. First, of course, you still want to read and understand all your stuff mentioned above. Or considering early exercising unvested options ISOs only. You just have more certain information to play with because the company stock is now public. R each out to me at meg flowfp. Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved.

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