Right, but why exercise the option without next selling it? If you’re quitting, that’s a risk. And AMT is applied on the gains. So your strike is $1, valuation currently at $100 and you pay tax on the $99 gain. Unless it’s Theranos that valuation wont go back to $1, so yes, you’re privileged.
In private companies, you often are unable to sell your shares because it requires board approval. The AMT trap, in oversimplified terms, is being wealthy enough on paper, due to shares, to trigger AMT but unable to sell shares to cover the taxes.
It can be a tough decision, but I have been through it enough times that I don't really care what the options package is. I just want one if everyone else gets one, but otherwise I look at salary and benefits. Because most likely the shares will become worthless, and if not, I most likely won't be around to see the liquidation event. I never exercise unless I know for a fact a liquidation event is coming.
Thats different than being an uber early employee and knowing your private equity is worth a ton. I also wouldn’t exercise random startup shares unless they were real cheap and I wanted to roll the dice. The uber example is clearer. I’d always rather be a paper millionaire than not a millionaire at all. At least you have the choice to exercise some if you leave, or all if you can afford the loans. Also uber is a bad example since people DID sell their private shares as there was enough of a marketplace for it.
Because you literally can’t sell it. This is why we people get stuck at startups. You must immediately exercise upon leaving but cannot sell, incurring huge tax bills but zero cash in your wallet.
If you are rich you can afford it. If you aren’t, you are forced to take zero.
