For example, let’s say:
- You just joined company Contoso after their series A round
- they gave you 15,000 ISOs (Incentive Stock Options) @ $0.25/share
Fast-forward to 4 years later. The company is still private, but doing well with each share valued at $10.
If you want to acquire some shares then, you will have to pay 15,000 * 0.25 = $3750 to acquire the shares. HOWEVER, given that the new share price is 40x the old one, the IRS will consider that you owe taxes on your paper gain of $146,250. This can be a huge issue for early employees!
There’s a way out of this though – you can often early exercise your grant, pay out the full amount (in our case $3750) and tell the IRS that you choose to exercise your shares early. You do this by sending them a form to tell them you’re doing an 83(b) election.
I know it’s a bit of tedious googling and paperwork but if you work at a startup that does really well, that could make the difference between life-changing money and walking out with nothing.
If you have any questions, feel free to shoot me an email – my address is in my profile
