Let's say an employee has personal savings $100,000 and is granted $100,000 in stock.
If they have to pay 20% tax on what they exercise, then they can only exercise ~$83,000 of their options. The remaining $17,000 worth will need to be exercised at a later date.
Let's say the company then gets sold 3 years later and the employee's stock is worth twice what it was when they were offered it. The employee's additional stock now is exercised immediately and the difference of $17k between the strike price and the sale price is taxable as income.
Had they been able to exercise that $17k worth of stock 6 months after joining—which they would have had the money to do if they hadn't had to immediately pay tax on the amount they exercised—then that $17k would have been taxed as long-term capital gains, at a lower rate.
Let's say an employee has personal savings $100,000 and is granted $100,000 in stock.
If they have to pay 20% tax on what they exercise, then they can only exercise ~$83,000 of their options. The remaining $17,000 worth will need to be exercised at a later date.
Let's say the company then gets sold 3 years later and the employee's stock is worth twice what it was when they were offered it. The employee's additional stock now is exercised immediately and the difference of $17k between the strike price and the sale price is taxable as income.
Had they been able to exercise that $17k worth of stock 6 months after joining—which they would have had the money to do if they hadn't had to immediately pay tax on the amount they exercised—then that $17k would have been taxed as long-term capital gains, at a lower rate.