Early exercise

Tax is assessed on the spread between strike price and fair market value at exercise. Immediately after a grant those two numbers are usually identical, so exercising then produces a spread of zero and no tax.

Wait until the shares have appreciated and that spread becomes real income, taxable at exercise for NSOs and an AMT item for ISOs. Early exercise removes that problem at the cost of paying for the shares up front.

The shares bought early remain subject to the original vesting schedule through a company repurchase right, exactly like founder reverse vesting. Leaving early means the company buys back the unvested shares at what was paid.

Early exercise only works if an 83(b) election is filed within 30 days. Without it the tax benefit is lost and the holder is taxed as the shares vest, at rising valuations, which is worse than not exercising at all.

The risk is straightforward: money is spent on stock in a private company that may be worth nothing. Early exercise suits low strike prices and small amounts, not a large cheque on a speculative position.