“Early exercise” stock options allow a service provider (employee, contractor, etc.) to exercise a stock option with respect to some or all of the unvested portion. The early exercised shares are shares of common stock held by the service provider and are subject to a repurchase option in favor of the Company, which lapses according to the original vesting schedule. By exercising early, the service provider may have more tax planning control over their shares. In addition, because the service provider’s own money is at risk, allowing early exercise may better align the interests of the service provider with other stockholders. However, if it is likely that the service provider will exercise within a short time after grant, it is probably easier to just grant Restricted Stock Awards at the outset. Further, if the options are Incentive Stock Options (which is often the case), the benefits to early exercising are eliminated by the tax disincentives to do so.
Glossary