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Subject:   ISO Question
Date:   Wed, 31 May 2000
From:   William

I recently joined a pre-IPO company who granted me an ISO of 75,000 shares at $0.XY. The ISO provides for early purchase of the options.

The company is planning to raise another round of private financing which will raise the valuation to approximately $Z.00.

Given the potential of a fairly large increase in value, it seems logical that I exercise while the value is still $0.XY and file the 83b election, rather than wait and have some taxes due upon exercise.

The real question is should I exercise all of the shares (which I can afford to do)? Is there an advantage to doing this now? We assume an October 2000 IPO and an initial price probably in the $AB.00-$AC.00 range. Seems like it would save paying taxes upon exercise later which might be significant if I choose to hold the stock.

William

Answer

Hello William,

Plus: You have a lower tax preference for making an early exercise. You start your holding period for the shares earlier, so you would be able to sell the shares sooner with long-term capital gain tax rates.

Minus: You have to pay for the stock. The fortunes of the company could reverse and you could lose your investment.

Good luck!

Mike Gray

For more information about incentive stock options, request our free report, Incentive Stock Options - Executive Tax and Financial Planning Strategies.

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.