📌 Educational Resource Disclaimer
This glossary provides general explanations of common equity terms. These definitions and examples are for educational purposes only and do not constitute legal, financial, or tax advice.
Equity structures vary significantly between companies, and your specific situation may have unique terms and conditions. For guidance on how these concepts apply to your individual situation, please consult with a qualified legal, financial, or tax professional.
83(b) Election
A tax form filed with the IRS within 30 days of receiving restricted stock (RSAs) or early exercising options. It allows you to pay taxes now based on current value, rather than later when the stock might be worth more.
How it works:
Receive restricted stock or early exercise
File 83(b) within 30 days of receipt
Pay ordinary income tax on current spread (FMV - price paid)
All future appreciation taxed as capital gains (not ordinary income)
Example (RSA with 83(b)):
Receive 100,000 RSA shares at $0.001 par value
Current FMV: $0.01/share
Pay: $100 (par value)
File 83(b): Pay tax on $900 spread (($0.01-$0.001) × 100,000)
4 years later: Sell at $5/share = $500,000
Tax: Long-term capital gains on $499,100 (~20%)
Without 83(b):
Each time shares vest, pay ordinary income tax on spread
If shares worth $5/share when vesting: Pay ~40% on $499,900
Much higher tax bill
Critical deadline: Must file within 30 days. Missing this deadline cannot be fixed and results in much higher taxes.
Why it matters: The 83(b) election is one of the most powerful tax strategies for early-stage equity. Founders and early employees should almost always file it.
Cashless Exercise
A mechanism (in public companies or acquisitions) where you can exercise options without paying cash. The company/acquirer withholds enough shares to cover the exercise cost.
How it works:
You have 10,000 vested options at $1.00 strike
Current price: $5.00/share
Exercise cost: $10,000
Cashless: Company takes 2,000 shares to cover cost ($10,000 ÷ $5)
You receive: 8,000 shares net
Why it matters: Cashless exercise removes the cash barrier in liquidation events, making options more valuable for employees who couldn’t afford to exercise.
Early Exercise
The ability to exercise unvested stock options immediately after grant. The shares you receive are subject to the same vesting schedule and repurchase rights.
How it works:
Receive 48,000 options with 4-year vesting
Exercise immediately (pay strike price for all 48,000)
File 83(b) election within 30 days
Shares vest normally over 4 years
If you leave early, company repurchases unvested shares at strike price
Tax advantage:
Pay tax on minimal or zero spread at exercise (FMV ≈ strike price early on)
All future appreciation taxed as long-term capital gains
Avoid AMT issues
Example:
Join startup, granted 40,000 ISOs at $0.10 strike (FMV = $0.10)
Early exercise: Pay $4,000 immediately
File 83(b): Pay tax on $0 spread (FMV = strike price)
4 years later: Company worth $5/share
Sell shares: $200,000 proceeds
Tax: Long-term capital gains on $196,000
Without early exercise:
Wait 4 years to exercise
FMV now $5/share
Exercise: Pay $4,000 strike + AMT on $196,000 spread
Massive tax bill before selling
Why it matters: Early exercise can save enormous amounts in taxes if your company succeeds. The earlier you exercise, the better (when FMV = strike price).
Exercise
The act of purchasing shares by paying the strike price of your vested stock options. You must exercise to convert options into actual shares.
What happens when you exercise:
You decide to exercise (say) 10,000 vested options
Strike price is $1.00/share
You pay the company $10,000
Company issues you 10,000 shares of common stock
You’re now a shareholder (no longer just an option holder)
When to exercise:
Early exercise (if allowed): Exercise before vesting to start capital gains clock
Before leaving: If you want to keep your equity (within post-termination window)
Before tax events: To lock in current FMV for tax purposes
Why it matters: You must exercise (pay money) to turn options into shares. Many employees can’t afford to exercise or don’t realize they need to before their window expires.
Post-Termination Exercise Window
The time period after leaving a company during which you can exercise your vested stock options. After this window closes, you forfeit unexercised options.
Standard windows:
ISOs: 90 days (IRS requirement to maintain ISO status)
NSOs: Can be longer (company decides), often 90 days to 10 years
Example:
You have 50,000 vested options at $1.00 strike
You quit your job or are laid off
90-day clock starts
Options worth $250,000 ($5 FMV - $1 strike × 50,000)
Must pay $50,000 to exercise within 90 days or lose them
Extended windows: Some companies now offer 10-year exercise windows for NSOs, making equity more valuable for employees who can’t afford immediate exercise.
Why it matters: The 90-day window forces departing employees to either come up with cash or forfeit valuable equity. This is one of the biggest problems with stock options. Many employees lose equity because they can’t afford to exercise.