You took a job at a private company and part of your pay came in equity. So here is the question worth sitting with: when, if ever, does that equity actually become something you can spend? The honest answer is that nobody knows. It might be an acquisition in a few years, a buyout later, a chance to sell some shares along the way, or a payday that never quite arrives. And yet many of the decisions that determine what you ultimately keep have to be made now, in the fog, long before any of that is settled.
That is the tricky thing about private-company equity. The moves that matter most happen while the outcome is still uncertain and there is not a dollar of cash in hand, and a good number of them cannot be undone once their window closes. The clock is often running before anyone tells you it started. Companies also stay private far longer than they used to, which means more and more of a company's value is created during these private years, while you are holding. That is exactly why these decisions matter even when no exit is on the calendar.
This guide covers the three forms of equity you are most likely to hold and the handful of decisions that genuinely move the needle. We are not going to pretend there is one right answer for everyone. We just want you choosing on purpose rather than reacting to a tax bill you never saw coming. One idea up front, because it runs through everything: the most valuable moves come early, while the numbers are still small, and some carry hard deadlines. The clearest is the 83(b) election, a one-page filing with a strict 30-day window that can save the right person a great deal of tax. If you are about to early-exercise options or receive restricted stock, raise it with us now, not later.
The Three Building Blocks
Almost all equity compensation at private companies comes in one of three forms. They are taxed differently, and the differences drive nearly every planning decision that follows.
Incentive Stock Options
The right to buy company stock at a fixed price (the strike). ISOs carry a real tax advantage: if you meet two holding requirements, your entire gain is taxed at lower long-term capital gains rates. The catch is that exercising them can trigger the Alternative Minimum Tax, which we cover in detail below. ISOs are the most planning-intensive of the three, and also the most rewarding when handled well.
Non-Qualified Stock Options
Also the right to buy stock at a fixed strike, but without the special tax treatment. When you exercise, the difference between the strike and the current value is taxed as ordinary income, just like salary. Simpler than ISOs, and more predictable, but generally less tax-efficient.
Restricted Stock Units
A promise to give you shares once conditions are met. You do not buy anything. RSUs are always taxed when they vest, at the full value of the shares as ordinary income. The wrinkle is what counts as vesting. Many private companies build in a double vesting requirement: the shares are not considered vested until you have both served the required time and the company has had a liquidity event. That second trigger is usually defined broadly to include an IPO, an acquisition, or a change of control. Because the tax happens at vesting, that requirement pushes the entire tax event out to whenever the liquidity event finally lands, which is why RSUs so often create a large, concentrated tax bill in the year a company is sold or goes public.
Why the differences matter
Options give you a choice about when to act, and that choice is where most of the planning value lives. RSUs largely take that choice away: the tax event happens when the shares settle, whether you are ready or not. The double vesting requirement on private-company RSUs is actually built to protect you. Without it, you could owe ordinary income tax on illiquid shares you have no way to sell to pay the bill. Tying the tax to a liquidity event means the cash to cover it generally arrives around the same time. Knowing which buckets your equity falls into is the first step, and your grant documents will tell you. If you are not sure, send them to us and we will sort it out together.
Stage One: Receiving and Holding Your Equity
Years before any liquidity, if it comes at all
This is the quietest stage, and often the most valuable. The company's official valuation -- the 409A value -- is usually still low, so the gap between your strike price and that value (the "spread") is small. Small spreads are a gift, because acting while they are small is what saves the real money later. The trouble is that nothing feels urgent yet, so this is exactly the stage people skip.
Early exercising options
When the spread between your strike and the current value is small or zero, exercising your options early means little or no tax today, and it starts the clock on long-term capital gains treatment. But be clear-eyed about the trade. You are spending real cash to buy stock in a company that may never have an exit at all, and may even fold. Unlike an IPO-bound company where the question is mostly when, here the question is also whether. That money is genuinely at risk, and you should treat it the way you would any bet you might lose entirely. The decision comes down to your conviction in the company, your cash position, and how much you could lose without it changing your life.
The 83(b) election
If you early-exercise options before they have vested, or you receive restricted stock outright, you have 30 days to file a one-page election with the IRS called an 83(b). It tells the IRS to tax you now, on today's tiny value, rather than later as the shares vest at a much higher value. Missing the 30-day window is one of the most expensive paperwork mistakes in equity planning, and it cannot be fixed after the fact.
What happens to your options if you leave
This one catches a startling number of people, and at a private company it can quietly cost you everything you built up. Most option grants give you a short window after you leave the company, very commonly 90 days, to exercise whatever options have vested. Miss that window and the vested options simply expire. They are gone.
At a public company you could just exercise and sell to cover the cost. At a private company you cannot sell, so exercising inside that 90-day window means writing a real check out of pocket for the strike price, and possibly a tax bill on top of it, all for stock you still cannot turn into cash. People leave a job, get busy, let the window lapse, and forfeit years of vested equity without realizing it until it is too late.
What to be doing now
- Confirm exactly what you hold, including strike prices, grant dates, vesting schedules, and your post-termination exercise window.
- Track the company's most recent 409A valuation, since it sets the cost of exercising.
- Decide, deliberately, how much capital you are willing to put at risk on a company whose exit is not guaranteed.
- If you ever early-exercise, calendar the 83(b) deadline the same day. Thirty days, no exceptions.
Stage Two: As an Exit Comes Into View
When acquisition talk, a funding round, or a secondary window appears
At some point the picture sharpens. Maybe there is talk of an acquisition, a new funding round at a much higher valuation, or the company opens a window for employees to sell some shares. The stakes climb in a hurry, because the spread on your options has widened with the valuation, and these are the decisions we spend the most time working through with clients. Two dominate: how to handle the AMT when you exercise ISOs, and how to brace for the wave of income a liquidity event can let loose. A third, the chance to sell early through a secondary, is newer and worth understanding.
ISOs and the Alternative Minimum Tax
Exercise an ISO and hold the shares, and you owe no regular income tax on the spread. The catch is that the same spread gets counted under a parallel tax system, the AMT. Exercise a large block in a single year and the AMT can hand you a sizable bill, even though you have not sold a share or seen a dollar of cash.
The AMT is not a penalty, and the money is not gone for good. What you pay generally turns into a credit you can recover in later years. But it is real cash out the door in the year you exercise, and it is far better planned for in advance than discovered the following April.
There are two separate figures, and they do different jobs:
The exemption is the amount of AMT income shielded before any AMT applies: $140,200 for married couples filing jointly and $90,100 for single filers in 2026. Above it, AMT income is taxed at 26%, rising to 28% above $244,500.
The phaseout threshold is the income level where you start losing that exemption: $1,000,000 of AMT income for joint filers ($500,000 single). So everyone gets the $140,200 to start, but once income climbs past $1,000,000 the exemption gets clawed back, and beginning in 2026 it disappears twice as fast as before. A high earner well above $1,000,000 effectively gets little or no exemption, which is what makes a large ISO exercise more painful than it used to be.
The central ISO question is how many options to exercise in a given year. Exercise too many and you manufacture an AMT bill you have to fund out of your own pocket. Exercise too few and you leave long-term capital gains treatment sitting on the table. The usual middle path is to exercise up to the point just before the AMT starts to bite, then keep going in later years, spreading the spread across several tax years. Whether that is right for you turns on your other income, the cash you can spare, and how much you believe in the stock.
A more realistic illustration
An employee holds 60,000 ISOs at a $3 strike. The latest 409A value is $28, so the spread is $25 per share, $1,500,000 in total if all are exercised at once.
Exercising everything in one year piles $1,500,000 of spread onto AMT income. That not only generates AMT on the spread itself, it pushes the employee well past the $1,000,000 phaseout, stripping away most of the exemption and exposing nearly all of it to the 28% AMT rate. The result can be an AMT bill in the mid six figures, due next April, with no shares sold and no cash received to pay it. At a private company that sting is sharper still, because there may be no market to sell into even if you wanted to raise the cash.
Splitting the exercise across, say, four years keeps each year's spread far lower, preserves more of the exemption each year, and still moves every share into long-term capital gains treatment once the holding periods are met. Same 60,000 shares, a dramatically smaller and more manageable tax cost, driven entirely by timing. The right number of tranches depends on the rest of your tax picture, which is the sort of thing we work out together.
Getting ahead of the income event
If you hold double-trigger RSUs, the liquidity event is the second trigger, whether that is an acquisition, a buyout, or an IPO. The full value of your vested RSUs becomes ordinary income that year, often a large amount stacked on your salary, and two things tend to surprise people. First, withholding usually falls short: employers withhold at a flat 22% (and a mandatory 37% on supplemental pay above $1,000,000), but once state tax and your true top bracket are counted, you can still owe more the following April. Second, compressing years of value into one tax year can ripple into Medicare surtaxes and phaseouts you have never had to think about. Knowing the number in advance lets us set aside the right amount and look for offsetting moves.
Selling early through a secondary
More and more private companies give employees a chance to sell some shares before any traditional exit, either through a company-sponsored tender offer (the company or an investor buys back stock at a set price) or a secondary sale to an outside buyer on a private marketplace. It is a rare chance to turn paper into real money while still private. Three things to keep in mind: the price is usually a discount to the headline valuation, since the buyer takes on illiquidity and risk; selling is a taxable event, so timing it around your holding periods matters; and the company controls the gate, since most private shares carry transfer restrictions and a right of first refusal. If most of your net worth is locked in one private company, taking some chips off the table, even at a discount, is often the rational move. We help you decide how much.
Stage Three: When Liquidity Finally Lands
The acquisition, buyout, IPO, or sale you have been waiting for
One day the event arrives. A larger company acquires yours, private equity buys it out, it finally goes public, or a sale closes. The form it takes shapes everything: your tax bill, your timing, and how much choice you actually have. Unlike a public-market sale you control, a private exit is often something that happens to you, on terms negotiated above your pay grade. Understanding the mechanics ahead of time is how you avoid nasty surprises.
What happens to your equity in an acquisition
When a company is acquired, your equity does not simply turn into cash. The deal terms decide its fate, usually in one of three ways:
Unvested equity is its own question: sometimes it accelerates and vests on the deal, sometimes the buyer assumes it on the original schedule, and sometimes it is forfeited. Note the contrast with an IPO, which does not touch your options at all, your strike, vesting, and share counts carry straight through. An acquisition can rewrite your equity entirely, so it is worth reading the merger terms before the deal closes, not after.
Escrows and earnouts
Private deals rarely pay everything on day one. Part of your proceeds may sit in escrow for a year or two, or ride on an earnout that pays only if the business hits future targets. The headline number is not the number in your pocket, so plan around the cash you will actually receive and when.
If you end up holding stock
If the exit leaves you holding tradable stock, whether your company went public or you now hold the acquirer's shares, you face the question every newly liquid employee does: how much of your net worth do you want tied to one company, especially one that may also sign your paycheck. A few principles help. Selling shares from RSUs or NQSOs usually triggers little extra tax, since you were already taxed on that value as income and your basis is the value at vesting or exercise. ISO shares are different: holding them long enough to meet the qualifying-disposition rules (at least two years from grant and one year from exercise) turns the gain into long-term capital gain, which can be worth waiting for. One wrinkle unique to private companies is that an acquisition can force a sale of your ISO shares before you have met those dates, turning hoped-for long-term gain into ordinary income with no say on your part. Knowing that in advance sometimes argues for exercising earlier to start the clock.
Diversifying a concentrated position
If one company ends up as the bulk of your net worth, that is a fragile spot: a single stock can lose most of its value and not recover, and if you still work there, your investments and your paycheck rise and fall together. How you address it depends on whether the stock is liquid. While it is still private, your only real lever is selling into the windows the company opens, the tender offers and secondaries from Stage Two. The sophisticated hedges people mention (collars, prepaid forwards, exchange funds) mostly do not work on illiquid private stock, since there is no public market to build them from. Do not count on hedging a private position; count on selling when you can. Once the stock is publicly traded, the fuller toolkit opens up: a disciplined selling schedule (on autopilot, to take the emotion out), gifting appreciated shares through a donor-advised fund, and borrowing against the position rather than selling. Two of our other pieces go deeper there, our notes on box spread lending and long/short extensions. Ask us when your situation calls for it.
Putting It Together
One idea runs through all three stages: the decisions worth the most are the early ones, made while you still have choices, and a good number of them cannot be walked back. The good news is that none of it is complicated once it is laid out in front of you.
| Stage | The decision that matters most |
|---|---|
| Receive & hold | Whether to exercise early while the spread is small, never missing an 83(b) deadline, and knowing your window to exercise if you leave. |
| Exit comes into view | How many ISOs to exercise each year to manage AMT, whether to sell into a tender or secondary, and bracing for the income event. |
| Liquidity lands | Understanding how the deal treats your equity, how much single-stock risk to keep, and meeting ISO holding periods where you can. |
You do not have to sort through this alone, and none of it should be improvised at the filing deadline. The technical part is the easy part once it is laid out: bring us your grant documents and your honest read on where the company is headed, and we will work the numbers and the paths side by side.
There is also a quieter piece of homework most people skip. Before the mechanics, get clear on what you actually want this equity to do. What would it make possible? What does enough look like for you and the people you love? What would you regret not doing, and what would you regret risking? The tax strategy should serve those answers, not the other way around. The clients who sit with these questions early, well before any payday, tend to be the ones who look back and feel they got it right. We are glad to be a sounding board for that part too.
