Early Exercise
Definition
The ability to exercise stock options before they vest. With early exercise, you buy shares immediately at the current strike price, and those shares are then subject to the company's repurchase right until they vest. Early exercise is paired with an 83(b) election to start the capital gains holding period and lock in the current (low) value for tax purposes.
Real-World Example
You join a startup at its founding. Your 100,000 options have a $0.01 strike price. You early exercise all 100,000 immediately, paying $1,000, and file an 83(b) election. You pay income tax on $1,000. If the company is worth $50/share at exit 5 years later, your entire $4,999,000 gain is taxed as long-term capital gains (~15-20%).
Common Mistake
Early exercising without filing the 83(b) election within 30 days. Without the 83(b), you are taxed on the value of shares as they vest — potentially at much higher values. Also, if you early exercise and the company fails, you lose the money you paid. Only early exercise when the cost is low enough that you can afford to lose it.
Why It Matters
Early exercise combined with an 83(b) election is the gold standard for tax optimization at early-stage startups. It only makes sense when the strike price is very low and the total cost is affordable. This is a time-sensitive decision that must be made early in your tenure.
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