I’ve had a lot of questions about early exercise as a manager and a leader. I personally think they are an important part of early stage startups option plans. Stock options are messy and Early Exercise is kind of a hack to work around some issues, but it’s one of the important band-aids in our comp toolbox.
I am not a tax lawyer, a CPA, or a financial advisor. Nothing in this post is tax advice, legal advice, or a recommendation to take any specific action. The numbers here are simplified illustrations, not predictions of your tax bill. Talk to your accountant or your tax lawyer before you do anything with real money. Everyone’s financial situation is different, and the tax code has more edge cases than a dodecahedron.
Your employer should have resources—HR, legal, finance—that can help you navigate your specific situation. Ask them. That’s what they’re there for.
Your stock option plan may not have early exercise. Early exercise is more common in very young, early or small startups. If your startup is past series B, early exercise tends to have increasingly tough tradeoffs.
You can save a ton of money on taxes.
Stock options are funny in that you are taxed twice - when you buy them - when you sell them
When you sell them, it’s just like selling any stock you buy on the public markets. Either long term or short term capital gains. You can’t do anything about the sell-side taxes.
With respect to the buy-side taxes, early exercise can potentially eliminate them.
Say you have 10,000 stock options with a strike price of $1.
If you don’t early exercise, the company goes public and you buy and sell those options on the same day for about $100 each, the math works like this:
We’ll make a factually incorrect, but directionally correct assumption that your tax rate is about 35%. We’re using 35% and 20% throughout to keep the math clean. Your actual rates depend on your income, state, and filing status—and the long-term rate creeps toward 24% at higher incomes. The exact numbers change; the principle doesn’t.
| Amount | Tax Rate | Tax Bill | |
|---|---|---|---|
| Buy 10,000 options | $10,000 | ||
| Buy-side tax on $990,000 gain | 35% | -$346,500 | |
| Sell shares | $1,000,000 | ||
| Short-term capital gains | 35% | -$346,500 | |
| Net | $297,000 |
Here’s the rough math with early exercise. We are making the assumption that your long term capital gains taxes are around 20%.
| Amount | Tax Rate | Tax Bill | |
|---|---|---|---|
| Buy 10,000 options at grant | $10,000 | ||
| Buy-side tax ($0 gain) | 35% | $0 | |
| time passes… | |||
| Sell shares | $1,000,000 | ||
| Long-term capital gains | 20% | -$198,000 | |
| Net | $792,000 |
You don’t have to early exercise the full amount of your grant. It’s ok to only exercise half, or only exercise what you can responsibly afford.
You could lose everything. If the stock ends up being worthless, which is the result for the vast majority of startups, you’ve essentially lost that money you spent on early exercise.
| Amount | Tax Rate | Tax Bill | |
|---|---|---|---|
| Buy 10,000 options at grant | $10,000 | ||
| Buy-side tax ($0 gain) | 35% | $0 | |
| meteor strikes… | |||
| Net | -$10,000 |
If you don’t have the money, you shouldn’t early exercise. Don’t borrow money from friends or family to do this. There are legal horror stories of those friends and family claiming full or partial ownership of the stock you purchase.
Personally, I wouldn’t and don’t recommend that you rack up debt or a large credit card bill to do this. If you have a rainy day fund or a special opportunity fund, Early Exercise may be a reasonable use of that money.
DO NOT FORGET TO SEND IN YOUR 83(B) ELECTION
You have exactly 30 days from the date of exercise to file your 83(b) with the IRS. Miss this deadline and it’s gone forever. There are no extensions, no exceptions, no do-overs. Send it via certified mail or another service that provides a receipt — you need proof that you mailed it within the 30-day window. Years from now, when it matters, that receipt is your evidence.
Some services like Carta may offer to handle the 83(b) filing for you. That’s great if it works. But this is ultimately your responsibility and yours alone. Never assume that a third party — your employer, your lawyer, your equity management platform — has actually filed it on your behalf. Verify. Get confirmation. Keep the receipt. If it didn’t get filed, the IRS doesn’t care whose fault it was.
Here are the basic steps:
I know I said it above, but it’s worth repeating: keep your certified mail receipt somewhere safe. It’s your proof to the IRS, years from now, that you filed on time. Lose it and you’re arguing with the government about a piece of paper you sent a decade ago. Don’t be that person.
| Scenario | Cost | Total Taxes | Net |
|---|---|---|---|
| Early exercise, company folds | $10,000 | $0 | -$10,000 |
| No early exercise, same-day sale (35% + 35% STCG) | $10,000 | $693,000 | $297,000 |
| Early exercise, sell after IPO (0% + 20% LTCG) | $10,000 | $198,000 | $792,000 |
Early exercise is a speculative investment. Most startups don’t work out and typically, you’ll be making this decision during the most optimistic chapter of a startup’s life, surrounded by people who believe.
You have to treat this as a risk. A $10,000 bet. Ten Grand Gamble. If the company hits, you keep an extra $495,000. If it doesn’t, you’re out $10,000. That’s the entire calculus.
Date____________
VIA CERTIFIED MAIL
RETURN RECEIPT REQUESTED
Department of the Treasury
Internal Revenue Service
ADDRESS FROM STEP 9 ABOVE
Dear Sir or Madam,
Enclosed for filing is an executed original and one copy of
an Election under Section 83(b) of the Internal Revenue
Code of 1986, as amended, for me:
Name: ______________
SSN: ______________
Address: ______________
______________
Please acknowledge receipt of this document by date-stamping
the copy and returning it to me in the self-addressed,
stamped envelope provided.
Thank You,
YOUR NAME