[nine_k]

If we talk about stock options, the company is still private, and no stock was issued.

Paying taxes on options for stock that may never materialize, or never be worth much, sucks.

I won't (and didn't) buy options before an IPO or an acquisition is scheduled, even if they had been granted, unless I have money to gamble on it. I won't consider options as a part of my pay, unless I'm a founder %) They are but a lottery ticket, even when your personal effort may significantly affect the odds of it winning.

[bagels]

The options are exerciseable whenever they are vested (and if you are on good terms, sometimes before that). This can be a waste of money, or a huge boon in terms of taxes avoided.

[nine_k]

In what circumstances would that be a huge boon, and how much risk / uncertainty is involved?

[bagels]

Let's say you have the opportunity to sell your shares in the private market for $2/share a few years after you've vested.

Exercise earlier: Strike price: $0.10 FMV at exercise: $0.20 Taxes: AMT on $0.10 gain (might be $0 in taxes) + Long term capital gains on $2.00-$0.10

Exercise at sale: Strike price: $0.10 Taxes: short term capital gains on $2.00-$0.10

Assuming a decently sized transaction: If your marginal rate is 35%, your long term capital gains rate might be 20%, saving you 15% of the sale price in taxes.

There is a risk that the money you pay to exercise ends up buying you worthless shares.

It all depends on the specific numbers. The longer you wait to exercise, the more likely you will have to pay significant AMT taxes (assuming increasing valuations) to the point where it no longer makes sense to exercise because you'd have to pay so much in AMT taxes for shares that may become worthless.

I gladly paid $10k to exercise so I could save $150k in taxes because I thought the odds were high that I would later be able to sell my shares for more than I paid.