Most stock-option plans let you exercise only vested options. Some — increasingly common — allow 'early exercise': you can pay for and own all your options immediately, then unvested shares get forfeited if you leave. Combined with an 83(b) election, this can be a massive tax win at companies that grow significantly after you join.
How early exercise + 83(b) works
- On your grant date, exercise all your options at the current strike (which equals current 409A fair market value).
- File a Section 83(b) election with the IRS within 30 days, electing to be taxed on the spread at grant-date FMV — which is $0, since strike = FMV.
- From that moment, you own actual shares with no tax owed and no AMT preference. Long-term capital gains clock starts.
- When you eventually sell, your basis is the strike price you paid. Everything above that is LTCG.
The math at a winning startup
Scenario: You join a Series A startup at $1/share. You're granted 50,000 options. You early-exercise on day 1, paying $50,000 and filing an 83(b). Five years later, company exits at $50/share.
- Without early exercise: 50,000 options × $49 spread = $2.45M ordinary income. Tax: ~$910K. Net: $1.54M.
- With early exercise + 83(b): 50,000 shares × $49 LTCG = $2.45M capital gain. Tax: ~$580K. Net: $1.87M.
- Difference: $330K in your pocket.
The risk
You put $50,000 down on day 1, before knowing if the company will succeed. If the company fails: $50K gone, no deduction beyond capital-loss treatment. If you leave before vesting: unvested shares are repurchased at your original $1/share — you didn't lose money but the upside is gone.
Early exercise + 83(b) is best at very early-stage companies where strike prices are low (under $1) and the absolute dollar cost is small. By Series C, strike prices are usually too high to justify the risk.