One point I would add: Options do expire, and at least where I work, the expiration is tied to when you leave the company. So, if I quit, I have 60 days to exercise my (vested) options. In plain terms, that means I have 60 days to buy the stock at strike price set in the options agreement. Until I read the agreement, I didn't realize that to make use of the stock options, I would have to spend my own money to buy the stock.
I suppose this is obvious to anyone in the know, but for a first-timer like me, it took a little time to wrap my mind around. I just thought stock options were like coupons I could turn in for gold coins or something :)
It is actually much worst than that. If you exercise your options while your company is still privately held, then you have no way to sell the shares which means that any gain is only a paper gain and should not be considered a taxable event. This is true until you recalculate your tax return using AMT which you are required to do by law. Currently AMT considers paper gain from options a TAXABLE event!!!! So if you are an employee and you decided to leave the company or if you are fired. You are between a rock and a hard place. You either walk away from the options. Or you have to come up with both the money to exercise the options and the money to pay the tax. And if the company tanks after you are gone, then tough cookie. You can only write off the loss $3K per year, one year at a time. On the other hand, if you are a Founder or co-Founder, you get to own shares and not options. Then not only do you not have to worry about exercising, but the clock starts right away for capital gain. And if you sell the company in five years, since these are 1244 stock, only half of the gain is subject to federal tax. The last part of the article is actually the most important. Think about the founders of Youtube. They were employees of Paypal and did not make a lot of money when it was acquired by eBay. But they gained experience, credibility, friendship, connection and just enough money to bootstrap their own idea. It worked out well for them in spite of the inherent pitfalls of owning options.
Yeah, you technically need money to buy options, but in most cases you're buying the stock only to immediately sell it again at its current (higher) value. If there's no buyer for your stock you can probably safely let them go, since the market (private as it may be) has determined they're worth nothing.
Not so fast. You also buy stock options when you quit the company, but want to keep the equity you worked 4 years to vest into. Many options plans will require you to buy them within 30-60 days of leaving the company.
For obvious reasons, the majority of options purchase scenarios could fall into this bucket, and not the "sure thing" of selling your in-the-money liquid options after an acquisition.
Another caveat about this is that there are plenty of horror stories about what happened to people with startup common shares that left their company before acquisition. You are, as you probably know if you're been reading here for awhile, last in line in a liquidity event.
One point I would add: Options do expire, and at least where I work, the expiration is tied to when you leave the company. So, if I quit, I have 60 days to exercise my (vested) options. In plain terms, that means I have 60 days to buy the stock at strike price set in the options agreement. Until I read the agreement, I didn't realize that to make use of the stock options, I would have to spend my own money to buy the stock.
I suppose this is obvious to anyone in the know, but for a first-timer like me, it took a little time to wrap my mind around. I just thought stock options were like coupons I could turn in for gold coins or something :)