Frequently Asked Questions
The Basics
When pre-IPO stock options expire, they become permanently worthless — you lose the right to purchase shares at your strike price, forever. There is no appeal, no extension, and no recovering that value even if the company later goes public at a much higher valuation.
ISOs (Incentive Stock Options) offer a potential tax advantage: no ordinary income tax at exercise, though the spread between your strike price and the 409A value triggers AMT. If you meet the holding period — one year from exercise, two years from grant — your gains are taxed at long-term capital gains rates rather than ordinary income rates.
NSOs (Non-Qualified Stock Options) are simpler: the spread at exercise is taxed immediately as ordinary income, appears on your W-2, and your employer withholds taxes. Future appreciation above your exercise price gets long-term capital gains treatment if you hold for a year or more.
A 409A valuation is an independent, IRS-required appraisal of a private company's common stock fair market value. Companies must conduct one at least annually, or after significant events like a new funding round.
It matters to you in two critical ways: first, it sets the minimum strike price for new option grants — protecting employees from receiving options that are already in-the-money at grant. Second, it determines your AMT exposure when you exercise ISOs. The gap between your strike price and the current 409A is your "paper gain" — and that spread is what the IRS taxes under AMT, even if you haven't sold a single share.
At most companies, vested options expire 90 days after your last day. That window is short enough that many departing employees miss it entirely — especially if job transitions, relocation, or other life events consume their attention.
Unvested options are forfeited immediately upon departure unless your agreement includes accelerated vesting provisions. Some later-stage companies now offer extended exercise windows (up to 10 years) for long-tenured employees — check your specific option agreement carefully, as this varies widely.
Tax Implications
AMT (Alternative Minimum Tax) is the most dangerous tax trap in pre-IPO option planning. When you exercise ISOs, the spread between your strike price and the 409A valuation is treated as AMT income — even though you received no cash and the stock is illiquid.
This is not hypothetical. It happened to thousands of employees after the dot-com crash in 2001. Modeling your AMT exposure before exercising — with a CPA, not a spreadsheet estimate — is non-negotiable.
The goal is to determine how many shares you can exercise such that the resulting AMT owed stays within what you can comfortably pay in cash. The calculation works like this:
AMT income added = shares exercised × (409A FMV − strike price). This amount is added to your other income, and your tax is computed under both the regular tax system and the AMT system. You owe whichever is higher.
Most people can exercise a partial tranche — far fewer than all their vested options — and stay within a manageable AMT range. The exact number depends on your filing status, other income, deductions, and state taxes. This requires a CPA with equity compensation experience to model correctly. Do not guess.
A disqualifying disposition occurs when you sell ISO shares before meeting the holding period requirements: one year from exercise and two years from the original grant date. This recharacterizes the spread at exercise as ordinary income — losing the ISO's preferential capital gains treatment.
However, disqualifying dispositions eliminate AMT retroactively. This makes them a legitimate tool in one specific scenario: you exercised ISOs early in a calendar year, the stock price has since dropped significantly below the 409A valuation at exercise, and you want to avoid paying AMT on a paper gain that has already evaporated. Selling those shares before December 31 of the same year triggers a disqualifying disposition — and wipes out the AMT liability — often saving far more than the ordinary income tax cost.
Exercise Strategy
This is the right question, and there is no universal answer. The decision hinges on four factors: the gap between your strike price and the current 409A (your paper gain), whether you can fund the exercise cost and potential AMT out of pocket, your honest assessment of the company's IPO or acquisition timeline, and your ability to tolerate the risk of holding illiquid stock.
Partial exercise — enough shares to stay below your AMT threshold while preserving some upside — is often the most prudent path when the strike price is well below the current 409A but liquidity is uncertain.
An 83(b) election is an IRS filing that lets you recognize taxable income on unvested equity at its current fair market value — rather than at vesting, when the value (and your tax bill) may be much higher. For pre-IPO options, it's most powerful when you exercise early, while the strike price and 409A are close or equal — locking in a minimal or zero taxable spread, and converting all future appreciation into capital gains.
If you're early-exercising options when the spread is small, file the 83(b) the same week — not the same month.
No. RSUs cannot use the 83(b) election. The IRS has explicitly ruled them ineligible because no property actually transfers at grant — you receive only a contractual promise of future shares. The 83(b) election requires an actual transfer of property.
If your grant agreement says "Restricted Stock Unit," filing an 83(b) accomplishes nothing. The election only applies to restricted stock (actual shares that vest over time) and early-exercised stock options where you physically receive shares before vesting is complete.
Liquidity & Post-IPO Planning
In some cases, yes — but with significant caveats. Secondary market platforms like Forge Global, EquityZen, and Nasdaq Private Market allow shareholders in late-stage private companies to sell shares to accredited investors. You must first exercise your options to own actual shares before selling.
Secondary transactions typically require company approval, are subject to right-of-first-refusal clauses in your shareholder agreement, and often trade at a 10–25% discount to the most recent 409A or preferred share valuation. Not all companies permit secondary sales at all. Review your shareholder agreement before assuming this option is available to you.
Most financial advisors recommend selling a meaningful portion at or shortly after lock-up expiration, for a reason that's easy to overlook: you already have enormous concentrated exposure to this company through your employment income, unvested equity, and the years of career capital you've invested in it. Holding more stock adds concentration risk on top of concentration risk.
Lock-up expiration also tends to create selling pressure as employees and early investors all exit simultaneously — which can depress the stock price in the weeks following. A disciplined, pre-planned sell schedule (e.g., sell 50% at lock-up expiration, 25% at six months, 25% at one year) removes emotion from the decision and systematically reduces your concentration over time.