[khuey]

Except that under US tax law, in that exact situation where you have options with a low strike price and the company's stock price has clearly increased significantly, the difference between the strike price and the stock price will be considered taxable income for the Alternative Minimum Tax (AMT) when you exercise.

In an absolute best case scenario where your strike price is 0 and the stock price is 100 (so the effective gain is infinite%) you're going to have income under the AMT regime of 100, and the effective tax rate under the AMT is around 30%. So you still have to pony up around 1/3rd of the current stock price in capital. This severely constrains the real multiple return that you can achieve when exercising into a non-liquid stock and exposes you to enormous downside risk if those returns do not materialize.

[vincentmarle]

If your strike price is near 0 then you should have done early exercise with 83b election to avoid the AMT tax (if your company permits this of course).

[gfodor]

Yep file those 83(b)’s, I agree if you fail to do this you’re in a much worse position. If your company doesn’t let you exercise — leave.

[toomuchtodo]

Not everyone knows this at the time, not every company will allow this.

[compiler-guy]

This falls under the, "Do I have enough capital to make the purchase?" question. And if the company fails, you get to write all this off at the previously taxed price.

Definitely a factor to consider, but not dispositive.

[jhallenworld]

But be careful with this: you can write off only $3000 per year of it against ordinary income. I knew someone during the dot-com bubble who had to take a mortgage to pay his AMT from buying his options, then the stock tanked and he could only write off this $3000 a year...

[khuey]

Also writing it off just means the government goes in for <your marginal tax rate>% of your loss, which is far less than 100%.

[coherentpony]

Even with a 30% tax bill in the worst case, the effective gain is infinite%.

[khuey]

No, it's not, because you have to pay the tax bill whether or not you ever see any returns.

[compiler-guy]

If the company fails, I get to write the taxed valuation off as a loss on my future taxes.

So this comes down to "Do I have enough capital and time to see it through?"

[cbanek]

That's true, but it may take a while for the company to fail, and in the meantime, perhaps no one wants to buy your stocks. I think there might be some way to give them back to the company if they want to, but not being able to sell them, even for a loss, keeps the loss from being realized and therefore deducted as a capital loss.