📖Case study: Maya

Maya joined a Series B startup in 2018. She received 8,000 ISOs at a $0.40 strike, vesting over four years with a one-year cliff. Her grant letter mentioned a 90-day post-termination exercise window.

She was 28. The job paid well enough that the equity felt like a bonus. She filed the grant letter and didn't think about it for a year.

After the cliff, Maya had 2,000 vested ISOs at $0.40 strike. The company's 409A had moved to $1.20.

She didn't exercise. She didn't know that exercising early would have started her long-term capital gains clock at the cheapest possible spread.

The company raised a Series D at a $5B valuation. The 409A jumped to $25 a share. Tech press called it a unicorn.

The company ran a tender offer at $40 a share. Employees could sell up to 25% of their vested shares. Maya, fully vested with 8,000 options, qualified to sell 2,000.

She had still not exercised. To participate, she had to exercise the 2,000 (cost: $800) and sell them in the same tender window. Same-year exercise and sale is a disqualifying disposition for ISOs, so the spread was taxed as ordinary income, not as AMT. Her CPA estimated a five-figure ordinary-income tax hit on the $40 minus $0.40 spread.

She participated anyway. After tax, the cash from the tender funded her down payment. The remaining 6,000 options stayed unexercised because she still could not comfortably cover the AMT exposure on a full exercise.

After working with her CPA, Maya exercised her remaining 6,000 options 4 months before the rumored IPO. The 409A had moved to $30. Spread at exercise: ($30 minus $0.40) times 6,000 = $177,600. AMT exposure was significant, and she pre-funded estimated tax payments to cover it.

By exercising and holding, she started the long-term holding clock. The grant date was already far enough back that the 2-year-from-grant rule was satisfied. The remaining requirement was 1 year past exercise.

The company IPO'd. Lock-up was 180 days. By the time the lock-up expired, Maya was about 10 months past her year-6 exercise. Selling then would have been a disqualifying disposition (still under 1 year from exercise), with the spread taxed as ordinary income.

She waited the additional 2 months. After the 1-year-from-exercise mark, her sale qualified for long-term capital gains treatment on the entire gain from strike to sale. The AMT she had pre-funded in year 6 became a minimum-tax credit she carried into the next several tax years.

Three things, in priority order:

Maya did fine in the end. Most of the people in her cohort did not, because the same decisions Maya almost got wrong, others did get wrong. The tools, the calendar, and a five-page grant letter would have been enough.