Stock Option strategies

A friend who works at a start-up asks for tax planning strategy for his stock options.

I have to admit I am quite weak in tax planning area. But I feel obliged to help him since he is a very good friend,

So what possible strategies that I can suggest to him?

If anyone knows good reading materials on this topic, please provide the link.

Thank you in advance.

First step is identifying what type of options he received or will receive. Incentive stock options ("ISOs") or nonqualified stock options ("NQSOs")?

You can do an internet search to learn more about the tax ramifications of each one. ISOs have more favorable tax treatment but the AMT event is a pitfall to watch out for and plan around.

If he is a good friend and this is not an area of your expertise, protect your friendship and find someone to refer him to

All he's asking for is the options for options.

Start with the book Consider your Options by Kaye Thomas

Are options for options equivalent to strategies?

I'd say they are, but such equivalence is optional.

Uh, back to the question!!

The important thing to note is that if these are ISO's, he'll likely pick up tax immediately via the AMT, assuming they're large enough.....that's a problem. He's in effect, paying tax ahead, and then, theoretically, gets credit for them when he exercises/sells. The trouble is that that often doesn't happen because the value drops instead of increases....

What I know is only learned from errors and surprises.

Also can subscribe to myStockOptions.com which has all you need to know about employee stock options.

For JR1, the trick with ISO's subject to AMT is to sell 1/3 to pay the AMT tax and keep the other 2/3 for long term capital gain.

And if they are NQSOs, a major decision needs to be made, depending on the optimism or pessimism about the future value of the stock. Whether to elect under 83(b) is the decision. Read section 83 in ts entirety, and specifically consider the restrictions that I assume would exist in the NQSOs, their value, the reportable income (and corporate deduction), the likelihood of the stock going way up in value, the possibility that it may go down in value, even to zero, and the tax aspects of all of the above, including the unusable loss if ...