So it's always better to own the stock ASAP (with risk of forfeiture) and get the 83(b) set up? Are most startups willing to arrange this for early employees?
You risk losing a lot with early exercise. The expected return on a $1 investment in option exercise is ??? hard to say.
What's even worse though is three years into employment deciding you hate your job and that you want to leave, realizing that staying and being alive are incompatible. And here we get real hypothetical ... you think the company has legs and that your stock might be worth something. But your strike price is $.05 per share and fair market value on Common Shares now is $1.50 per share. If you exercise your three years of options at this point hoping for the likely $10 per share IPO, you're stuck paying immediate regular income tax rates on your $1.45 per share immediate paper gain. And you may not have enough money to pay those taxes because they far outweigh your outlay for the stock exercise itself. And then you also risk the company going bust and you may end up with deducting max $3k/year in capital losses for the rest of your life.
That scenario is why I like buying up front in an early exercise.
In my last company I did the early exercise, though. And I stuck around for a long time. And that early stock was highly diluted and ended up being a small fraction of my overall stock option grant. I'm not sure it was worth it but we finally were acquired.
