Early Exercise
Exercising stock options before they vest, typically paired with an 83(b) election for tax benefits.
Definition
Early exercise is the ability to exercise stock options before they vest. The purchased shares are still subject to the original vesting schedule and the company can repurchase unvested shares at the exercise price if you leave. Early exercise is almost always paired with an 83(b) election to start the capital gains holding period immediately. This strategy is most beneficial when the strike price is very low (early stage).
Why it matters
Early exercise with an 83(b) election at a very early-stage company can save enormous amounts in taxes. By exercising when the shares are nearly worthless, you pay minimal income tax and start the long-term capital gains clock.
Example
You join a seed-stage company and early-exercise all 50,000 options at $0.10/share, costing $5,000. You file an 83(b) within 30 days, paying negligible tax. Four years later at IPO, shares are worth $20 each. Your entire $995,000 gain is taxed at 20% long-term capital gains instead of 37% ordinary income. Tax savings: roughly $170,000.