This can go both ways. You can buy in with a strike price of 1.00 while the IRS value of your company is still low, say 2.00. You pay the taxes on the 1.00 difference since the IRS counts that as income, and you become a shareholder.
If your company raises funding in the future and the price goes up to 5.00 it's all profit (aside from capital gains tax when you sell, but chances are you'll pay long term capital gains since you're already a shareholder and these things don't happen overnight). This is better than buying in after the round of funding where you'd pay taxes on the difference of 4.00.
This is why it can be a good idea to exercise your vested shares before a round of funding where the price will go up. It's a trick to minimize your taxes. Not saying there's any less risk in purchasing the shares of a startup however.
If your company raises funding in the future and the price goes up to 5.00 it's all profit (aside from capital gains tax when you sell, but chances are you'll pay long term capital gains since you're already a shareholder and these things don't happen overnight). This is better than buying in after the round of funding where you'd pay taxes on the difference of 4.00.
This is why it can be a good idea to exercise your vested shares before a round of funding where the price will go up. It's a trick to minimize your taxes. Not saying there's any less risk in purchasing the shares of a startup however.