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by caseysoftware
3411 days ago
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Close, but not quite. The time limit is to when you have to file the 83b with the IRS to document the early exercise. The rest of what you said applies. The key thing is that you want the delta (between exercise price and FMV) to be as small as possible. Of course, none of that matters if the company isn't going to succeed anyway. * And yes, I have done this. I early exercised all of my shares at Twilio. |
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The key thing is that you want the delta (between exercise price and FMV) to be as small as possible — at the time of exercise.
If you exercise any time but (effectively) immediately upon being granted your ISOs, you're liable for the taxes on the delta between your strike price and the FMV at time of exercise. If you exercise immediately, that should be zero. But it's that delta — between strike price and FMV at time of exercise — that can factor into AMT in a particularly surprising, and often very unpleasant way.
Forward-exercising and making an 83(b) election also starts the clock ticking on capital gains tax. Effectively, if you're starting at a brand new unicorn, and exercise your entire grant on Day 1, you'll only owe Long-Term Capital Gains tax (15%, instead of regular income rates — or, worse, AMT) on the entirety of your (initial) option grant, the day you hit your vesting cliff.
IANA Tax Attorney, or Accountant. Caveat lector.