At the moment I'm 50% vested in my ISOs, about 10,000 shares. My strike price is $2. The company has had a few rounds of investment, and the latest preferred share price is $6. When I joined two years ago, the preferred share price was $4. In the next couple of years we could raise money again or try to go public. No guarantees though, and I put the chance of going public at say 30% and raising more money at 70%.
What I've been wondering is if I should exercise my vested shares in order to lock in long term capital gains, instead of waiting for a liquidity event to exercise, where I'd be paying regular income tax rates. I'm in California, household combined income is $260k.
My logic is this:
- If the stock goes up to say $10/share and I exercise at the liquidity event, I'd pay ~35% total effective rate on $80,000, so $28,000
- If I exercise now and the stock goes up in the same way, I'd pay 15% LTCG on the $80,000, so $12,000
- Therefore, I'm essentially betting $20,000 (cost of exercise) to make $16,000 (delta between 35% tax - 15% tax)
A $16,000 delta is nothing to sneeze at - but is it worth betting $20,000 on it? Is this even the right way to think about it?