[virgilp]

Another thing that may be hard to understand for non-US citizens. For me, exercising options costs me just that, the option price + bank fees; I owe no tax. I have to pay full tax when & if I sell the shares. This seems like a much fairer taxation regime - I pay tax when I earn something - just having un-sellable shares didn't suddenly increase my wealth.

With this, it actually makes sense to exercise options and stay employed at the startup: you now may not be qualified as a short-term seller when you sell the stock, since you held on to it for a while.

[jagged-chisel]

One should exercise at the earliest possible convenience. If I'd exercised on day 1 when I joined a startup, I wouldn't have owed tax because I wasn't getting a discount, but a locked-in price. So when I exercised after the value increased, I then owed tax.

I've seen it suggested that one should exercise on day 1. But that doesn't have to mean you pay for them immediately (after all, you don't get to keep them immediately - you have to wait for vesting...), so you work out a payment plan with deductions every paycheck so that you've pay fully for whatever is vested at the time it vests.

[jasondelta]

Or one should never exercise at all until an acquisition or an IPO happens.

I've seen too many people exercise stock options trying to minimize tax implications down the road, only to see them eventually leave the company for any number of reasons and they end up get heavily diluted to almost nothing in future rounds. All that money basically down the drain trying to chase long term capital gains vs regular income tax rates when the likelihood that they'll make anything is extremely low.

Everyone's risk posture is different, but considering how few startups are actually successful, I would argue it's better to just assume the options are worthless and just deal with the regular income tax situation if you get lucky enough to be around during an IPO or acquisition.

[jagged-chisel]

You're definitely correct. "Convenience" is emphasized. If it's not convenient to exercise, don't; wait until a liquidity event.

This makes me curious: what's the total typically required to purchase one's options (not including the potential tax implications)? Does it vary wildly from a couple thousand to tens- or hundreds-of-thousands? Lottery ticket money, or significant fractions of annual income?