> I have all exercised options, but not all vested, been here about 2 years, so half vested. Didn't pay taxes at exercise because there was no difference between exercise price and market price.
Early exercise with a 83b election?
You will be fine.
The tax problem happens like this:
1. Your option strike price is $0.01/sh
2. The current price as set by the board (or the stock market if public) is $10/sh
3. You exercise 2000000 shares
4. You write a check to your company 2000000 sh * $0.01/sh = $20000
The fair market value (as determined in step #2) is 2,000,000 sh * $10/sh = $20,000,000
The IRS says "wait a minute you only paid $20,000 for something that is worth $20,000,000".
The difference $20,000,000 - $20,000 = $19,980,000 was a 'gift' that requires taxes to be paid.
Now lets do the 83b election with early exercise. In that case the FMV == the strike price on the options. The difference is $0 You are paying FMV and there is no 'gift'.
Early exercise with a 83b election?
You will be fine.
The tax problem happens like this:
1. Your option strike price is $0.01/sh
2. The current price as set by the board (or the stock market if public) is $10/sh
3. You exercise 2000000 shares
4. You write a check to your company 2000000 sh * $0.01/sh = $20000
The fair market value (as determined in step #2) is 2,000,000 sh * $10/sh = $20,000,000
The IRS says "wait a minute you only paid $20,000 for something that is worth $20,000,000".
The difference $20,000,000 - $20,000 = $19,980,000 was a 'gift' that requires taxes to be paid.
Now lets do the 83b election with early exercise. In that case the FMV == the strike price on the options. The difference is $0 You are paying FMV and there is no 'gift'.