Let’s be honest. As a founder, your brain is buzzing with product roadmaps, fundraising, and hiring. Tax planning? It feels like a complicated, distant chore. Something to handle “later.”
But here’s the deal: the early decisions you make—especially around your equity—can save you a staggering amount of money down the line. We’re talking life-changing sums. This isn’t about boring forms; it’s about building your net worth as strategically as you build your company.
The Foundational Move: Understanding Your Equity Types
Before any strategy, you need to know what you’re holding. It’s like knowing the difference between a seed and a sapling—they grow differently.
- Stock Options: The right to buy shares at a fixed price (the “strike price”) later. Mainly, you’ll encounter two flavors.
- Incentive Stock Options (ISOs): The holy grail for potential tax treatment, but with strict rules. Can trigger the dreaded Alternative Minimum Tax (AMT).
- Non-Qualified Stock Options (NSOs): More flexible, but taxed as ordinary income when you exercise.
- Restricted Stock Units (RSUs): These are grants of stock that vest over time. They’re taxed as income when they vest, which is simpler but offers less upfront planning control.
Got it? Good. Now, let’s get into the real tactics.
Early-Stage Tax Planning: Your Pre-Exercise Playbook
This is where you plant the flag. The goal? Set the lowest possible price for your future growth.
The 83(b) Election: Your Secret Weapon for Restricted Stock
If you receive restricted stock (actual shares subject to vesting), listen up. The 83(b) election is a tiny form with massive implications.
Normally, you’re taxed as shares vest, on their value at that time. With an 83(b), you choose to be taxed now on the current fair market value—which, in the early days, is often super low, maybe even the par value of pennies per share.
The catch? You pay tax upfront on income you haven’t actually received yet. And if you leave before vesting, you forfeit the shares and the taxes you paid. It’s a gamble, but for founders, it’s often a brilliant one. You have just 30 days from receiving the grant to file with the IRS. Don’t miss this window.
Setting Your Strike Price During Fundraising
When you set your option strike price after a priced funding round, it’s typically at the new, higher fair market value (FMV). But timing matters. If you can grant options before the round closes, you might set a lower strike price, based on the pre-money valuation. This creates immediate potential upside for your team… and for you.
Navigating the Exercise: ISO vs. NSO Strategies
This is the moment of truth—turning your paper options into real shares. The path you choose depends heavily on the type.
| Consideration | Incentive Stock Options (ISOs) | Non-Qualified Options (NSOs) |
| Tax at Exercise | No regular tax, but may trigger AMT | Taxed as ordinary income on the spread |
| Holding Period for Best Rate | Hold for >1 yr after exercise AND >2 yr after grant | Hold for >1 yr after exercise |
| Ideal Strategy | Exercise early while value is low to minimize AMT & start holding clock | Exercise strategically based on cash flow; maybe sell-to-cover |
For ISOs, the dream is the qualifying disposition—selling after meeting those holding periods. The entire profit (sale price minus original strike price) is taxed at long-term capital gains rates, which are significantly lower than income tax. The catch, again, is the AMT shadow. Exercising a large chunk of ISOs can create an AMT bill even if you don’t sell. It’s a complex calculation, often requiring a good tax advisor.
Advanced Maneuvers for the Growing Startup
As your company matures, the stakes—and opportunities—get bigger.
Pre-Liquidity Planning: The “Cashless Exercise” Dilemma
Many founders use a cashless exercise at a liquidity event. It’s convenient—the company or broker sells enough shares to cover your costs and taxes. But it’s also a tax maximizer, not a minimizer. You trigger a huge taxable event all at once.
A more nuanced approach? Exercise portions of your options over several years, smoothing out your income and potentially managing AMT exposure. This requires cash, sure. But it’s the definition of planning.
QSBS: The Founder’s $10 Million Tax Exemption
Pay close attention. Qualified Small Business Stock (Section 1202) can be a game-changer. If you hold founder shares in a qualified C-corporation for more than five years, you may be able to exclude up to 100% of your capital gains, capped at the greater of $10 million or 10x your basis.
The rules are picky—the company must be an active C-corp under $50 million in assets when you get the stock. But if you qualify, it’s one of the most powerful tax breaks in the code. Seriously, don’t overlook this.
Common Pitfalls (And How to Sidestep Them)
We’ve all seen the horror stories. Here’s how to avoid them.
- The AMT Surprise: It’s not a “maybe.” If you exercise ISOs, model your AMT exposure. Use an online calculator or, better yet, talk to a pro. No one likes a six-figure surprise tax bill.
- Missing Deadlines: The 83(b) 30-day window. The ISO holding period clocks. Tax is a calendar-driven game. Put these dates in your founding docs.
- Ignoring State Taxes: Moving from California to Texas before a liquidity event? That has implications. State residency planning is a real thing.
- Going It Alone: This is complex. Find a CPA or tax attorney who specializes in startups. The cost is an investment.
Wrapping It Up: Think Like a Founder, Act Like a CFO
Look, building a company is a series of leveraged bets. You bet on a market, a team, a vision. Tax planning is simply betting on your own success—and structuring that bet to keep as much of the reward as possible.
It requires shifting your mindset. That equity isn’t just a number on a cap table; it’s a financial instrument with its own rules and timelines. Start the conversation early. Model scenarios. Ask “what if.”
Because the ultimate exit strategy isn’t just about building something valuable. It’s about keeping what you’ve earned.
