You Aren't Rich. You Are a Tax Liability.
I met a Senior Engineer last week. Let’s call him Dave. Dave was employee #10 at a hot AI startup. On paper, his stock options were worth $2 Million. Dave felt rich. He bought a Tesla. He looked at houses.
Then he quit his job. He had 90 days to "Exercise" his options (buy the stock) or lose them. He spent $50,000 of his savings to buy the shares. He thought: "I'm smart. I own the stock now. When we IPO next year, I'll be set."
April 15th came. Dave got a tax bill for $400,000. Why? Because of a three-letter acronym that destroys lives: AMT. Dave didn't have $400k. He couldn't sell the startup stock because the company hadn't IPO'd yet. Dave is now in debt to the IRS for stock that might be worth $0.
This is the 'Golden Handcuff' trap. Here is how the system is rigged against employees and why you need to be terrified of your own equity.
1. The "Phantom Tax" (AMT)
Most startups give you Incentive Stock Options (ISOs). They tell you: "ISOs are great! You don't pay tax when you buy them!" That is a half-truth. You don't pay Regular tax. You pay Alternative Minimum Tax (AMT).
Here is the math that kills you:
- Strike Price (What you pay): $1/share.
- Fair Market Value (What the IRS thinks it's worth): $10/share.
- The Spread: $9/share.
If you buy 100,000 shares, you made a "paper profit" of $900,000. You haven't sold a single share. You have $0 cash. But the IRS treats that $900k as income for AMT purposes. They send you a bill for ~28% of that imaginary money. You owe $252,000 in cash, immediately.
2. The "90-Day" Death Window
When you leave a job, you usually have 90 days to exercise your options. This is designed to force your hand.
- Option A: Don't buy. Lose the $2M of equity you worked 4 years for.
- Option B: Buy. Pay the $50k exercise cost + the $250k tax bill.
If you don't have $300k liquid cash lying around, you are trapped. You have to walk away from your equity. The Fix: Negotiate an "Extended Exercise Window" (7 to 10 years) in your offer letter before you sign. Once you sign, it’s too late.
3. The "Secondary Market" Mirage
"I'll just sell some shares to investors to pay the tax!" No, you won't. In 2025, most startups have a "Right of First Refusal" (ROFR) clause. It means you cannot sell your stock to a third party without the CEO's permission. And CEOs rarely give permission because they don't want random investors on their cap table. You are holding an asset that is legally locked, illiquid, and heavily taxed.
The Real Numbers: The "Win" vs. The "Disaster"
I compared two scenarios for an engineer with 50,000 options.
| Scenario | What You Did | The Outcome |
|---|---|---|
| The "83(b)" Pro | Filed an 83(b) Election within 30 days of joining. | $0 Tax. You paid tax when the stock was worth $0.01. You walk away with millions tax-free (QSBS). |
| The "Ignorant" Saver | Waited 4 years to exercise. | $150k Tax Bill. Owed immediately. High risk of bankruptcy if IPO fails. |
| The "Liquidity" Trap | Took a loan to pay the tax. | Disaster. Startup failed. Stock went to $0. You still owe the bank the loan + interest. |
The Verdict: If you missed the 83(b) Election window (30 days after grant), do NOT exercise unless you have a guaranteed buyer or you have cash you are willing to set on fire.
Frequently Asked Questions (That Wealth Managers Charge For)
Can I file an 83(b) late?
No. The deadline is strict: 30 days from the grant date. If you mail it on Day 31, the IRS rejects it. No exceptions. This is the single most expensive mistake in tech history.
What happens if I can't pay the AMT?
You enter an "Offer in Compromise" with the IRS. It ruins your credit score. Or you take a high-interest loan against the private stock (if you can find a lender like SecFi). It is a nightmare.
Should I exercise "Early"?
Yes, if your company allows "Early Exercise." Buy your shares when they are worth pennies. File the 83(b). Then you own them. If you leave the company, you keep the stock, and you owe $0 extra tax. This is the only safe way to play the game.
Leon Staffing connects you with companies that offer "Early Exercise" and fair equity terms. Don't sign a contract that bankrupts you. Check our vetted listings.