Pre-IPO: Early Exercise Options

Articles   (Jump to FAQs)

Early Exercise Options: Clarifying The Confusion And Risks
(Part 1) 

David Cowles
Making the decision to exercise now or later has always been difficult. It has become even more confusing with a twist at pre-IPO companies that allows you to exercise options immediately upon grant.

Early Exercise Options: Clarifying The Confusion And Risks
(Part 2) 

David Cowles
Early exercise options are associated with risks and tax complexities. These issues, however, should not scare you from taking advantage of them when you know how to maximize their value.

Early Exercise ISOs Complicated By Final IRS Regulations 

Michael Frank
The IRS has issued final regulations on ISOs. Understand how these final regulations increase the risks of early exercise.

Final ISO Regulations Affect Stock Plan Design, Optionholders, And Advisors (Part 1) 

Ellie Kehmeier and Elizabeth Drigotas
The final rules clarify and consolidate a tangle of proposed, temporary, and final regulations, as well as other guidance, that governed the taxation of ISOs, including rules for disqualifying dispositions.

IRS And Treasury Warn Against Frivolous Tax Arguments Surrounding Stock Options

IRS and US Department of the Treasury
The Treasury and IRS have warned taxpayers about promoters who claim they can help optionholders avoid income tax or AMT on stock option exercises. The notice presents several frivolous arguments you should not make on tax returns. The IRS has been aggressively pursuing and winning cases against such arguments. (To read this you need the Adobe Acrobat Reader, which you can obtain free here.)

Now That's An Interesting Option

Bill Bischoff
SmartMoney.com, 8/23/00
You've got options that are unvested, but you can exercise them. These immediately exercisable options are sweeping the pre-IPO world. Learn some of the basics and must-do steps, including the Section 83(b) election.

Stock Options Lost Value? Little-Known Provision May Be A Life Preserver

Tracy Byrnes
TheStreet.com, 5/11/00
Check your options grant to see if you have an early exercise provision. If you do, you may be able to take advantage of a little-publicized tax perk that lets you lock in future appreciation when you sell at the long-term capital gains rate of 20%. Remember, however, to file the Section 83(b) election form with the IRS.

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FAQs   (Jump to articles)

What is a "repurchase right"? 

A repurchase right is a company's contractual right to buy from an employee any stock resulting from the exercise of an option. The repurchase right can be exercised even if the employee does not...

Why do some companies grant stock options that are immediately exercisable before they vest and are subject to a repurchase right by the company? 

Some companies grant stock options that are immediately exercisable, but you receive shares that still need to vest before you own them outright. Until then, the stock is still subject to a repurchase right if your employment ends before vesting. Check your grant agreement for whether your options are immediately exercisable at grant before vesting, and check the repurchase details...

When should I prefer to immediately exercise an option into stock that is still subject to vesting and/or a company repurchase right? What is the risk? 

If your plan permits this strategy, it makes sense in certain situations...

My company allows me to exercise my ISOs early and receive stock subject to a company repurchase right during the vesting schedule. Does my early exercise before vesting affect the calculations for AMT or disqualifying dispositions? 

Generally, stock options are exercisable when they vest. However...

Can my company file my Section 83(b) election for me? 

Yes. The IRS has allowed employers to file Section 83(b) elections for employees...

Is a Section 83(b) election that taxes you on the value of the stock option spread at early exercise (vesting required for resale) ever revocable or rescinded? 

The Section 83(b) election is irrevocable unless you show a...

Can I exercise my options before they are vested and make a timely Section 83(b) election to be taxed on the spread at that point? 

Generally, stock options are exercisable only when they vest. However, some pre-IPO companies grant options that...

I have early exercise options. If I leave my company before my options vest, or if it goes out of business, is my company required to repurchase my shares? 

When your plan allows options to be exercised before they vest, the stock you receive is subject to a company repurchase right if you leave the company before the vesting date. Under the typical early exercise provision in most stock plan documents...

My pre-IPO company lets me exercise options still subject to vesting. I did so and received stock subject to a company repurchase right. I am now leaving my job before the shares vested. What are the tax consequences if I forfeit the stock for which I have made an 83(b) election to be taxed at the time of exercise? 

When you exercise options that are still subject to a vesting schedule, you essentially have purchased restricted stock. You then file a Section 83(b) election...

I exercised stock options in a pre-IPO company and paid tax on the spread at exercise. The price used for the fair market value (FMV) now seems high, given the expected IPO price. Can I use the IPO price to recover taxes that were paid? 

You take this risk in a pre-IPO situation, when valuation...

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