Is there a tax advantage in exercising my stock options early?
June 12, 2000
Subject: ISO Question
Date: Wed, 31 May 2000
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.
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.