[thruhiker]

Exercising NSOs generates taxable income on the difference between the exercise price and the Fair Market Value (FMV) as determined by the current 409A valuation.

Exercising ISOs does not generate taxable income nor immediate capital gains when the option is exercised, but you will generate capital gains in the future on the difference between the sold price and the strike price when you sell your exercised options. If you are higher income, which is common if you work for a startup on the product and engineering teams, the difference between the strike price and the FMV when exercising the option counts towards AMT calculations.

It's common to pay AMT when exercising ISOs but you do generate AMT credits that can be used in future tax years when your taxable income and capital gains are below the threshold for triggering AMT.

Carta has a great article on ISOs vs NSOs that goes into more detail: https://carta.com/blog/equity-101-exercising-and-taxes/

[HWR_14]

So, should I expect that a first hire likely has options and a founder started with stock? Is there any reason a founder wouldn't just start with a percentage of the company.

[thruhiker]

I believe founders will own a percentage of the company outright as recorded in the cap table.