[lamontcg]

The big thing to avoid is exercising at a high price, paying all your taxes, then watching the shares plummet the next year, and eventually selling at a loss and winding up with only the maximum carryover cap gains loss every year after that.

So the worst outcome is that your strike is $1.28 you exercise at $3.13 (costing you $80k + $40k in taxes or whatever -- it gets worse the better the stock is doing, which is one of many reasons why early exercise of options is risky but good) but you're stuck in a holding period while you go public, then when you exit that period you're at $0.50 or something like that, and you've passed over into a new tax year, and you have no cap gains to offset the losses on the stock.

This happened to a lot of employees at dot com companies in the 2001 collapse.