| #include <IANAL.h> You basically have the "option" to purchase the stock for a set price (your strike price) for some period of time. Yes, to exercise your options you would have to purchase the stock at the strike price, and then sell it at the current (higher) price. With few exceptions, you can't do any of this until/unless the company IPO's and is publicly traded. Because you have not been granted anything of direct value (that would be a stock grant, not an options agreement), you have no tax liability, because, well you don't have anything :) 5 Years is a bit rough, a typical vesting schedule is 4 years, typically with a 1 year cliff (nothing vests until you reach 1 year of employment, then 25% (or in your case probably 20%) of the shares are vested, meaning you could exercise them. After this, a proportionate amount of additional shares vests each month until the 4 or 5 year mark). If something happens to the company before the 5 year period, some combination of losing any/all shares (vested or not), getting new/additional shares, getting an entirely new allocation of shares, or having the strike price adjusted is likely to happen. You don't actually own anything until you exercise (buy) the shares. And I HIGHLY recommend you don't purchase any of the vested shares until the company is public, and only then when you intend to exercise them immediately (which is generally a cashless transaction). The hard facts are that until there is an IPO, common stock (what you have options to) is very likely to get whacked around a fair bit, and you stand to lose far more than you gain. |
Usually true, but not always. There are situations in which purchasing shares over several years prior to a pricing event can avoid AMT screwing you. It is rare, but it happened to me once. It happens when the details of the pricing event count as income under AMT, but not under ordinary tax rules. If you have large deductions under ordinary tax rules (the most common is the federal deduction for taxes paid to the state), then AMT can hit you.
If you think this might happen to you, discuss with a competent accountant. The rules are complex, I don't know them, and all I can usefully tell you is that it is possible, it is rare, and I very nearly was in a case where it would have happened. (I was careful to purchase options early so that eBay's purchase of Rent.com with stock would not trigger AMT consequences. Then the deal was changed to cash and it didn't matter.)