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.
