Early‑Exercise Stock Options & the 83(b) Election
Why early‑exercise even exists
Most private, pre‑IPO companies let employees exercise certain stock options (ISOs or NSOs) before they vest. Employees who do so can then file an 83(b) election, paying tax on today’s (often tiny) spread instead of a potentially huge spread years down the road.
Tax mechanics in plain English
Key benefit: you lock in long‑term capital‑gains treatment and (often) avoid ordinary‑income tax on the bargain element.
Key risk: you pay cash for shares that might never vest or could become worthless.
Real‑world example
*Assumes 32% ordinary and 15% long‑term capital‑gains rates.
By early‑exercising half his grant, Will saved roughly $17,000 in tax versus waiting, but he also locked up $25,000 four years earlier and risked losing it all if the company hadn’t exited or if he’d left before vesting.
When an 83(b) election can make sense
Low FMV & low exercise price — Spread is pennies, so upfront tax is minimal.
Strong conviction — You believe in the company and plan to stay through full vest.
Extra cash on hand — The exercise money (and any tax) won’t derail your near‑term goals.
When to skip it
You’re unsure you’ll stay until vest.
You’d need to dip into emergency funds to exercise.
FMV is already high, making upfront tax painful.
The company’s exit timeline is murky.
Bottom line
Early‑exercising and filing an 83(b) election can be a powerful, tax‑efficient play, but only if you can afford to lose the money you put in. Talk with a tax pro or financial planner who specializes in equity comp before pulling the trigger.