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Reverse Vesting

Also known as early exercise, this is sometimes a feature of stock option plans at pre-IPO companies. With reverse vesting, by paying the option price you are allowed to immediately exercise options when they are granted. For each option exercised, you receive a share of restricted stock, which is subject to a holding period (e.g. four years with 25% vesting per year) based on the stock plan's original vesting schedule. You do not own the shares outright until they have vested. Companies usually hold the restricted shares in an escrow account until the vesting date. The company retains the right to repurchase any unvested restricted shares (usually at the exercise price) if your employment ends.

To undertake reverse vesting, you must file a Section 83(b) election within 30 days of exercise. The 83(b) election allows you to pay taxes on the value of the shares at the time of exercise instead of when the restrictions lapse. This causes any appreciation after the exercise of the options to be taxed as capital gain (see the FAQs on early-exercise options).

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