This document provides information about stock options and early exercise. It begins with a disclaimer that the information provided is not financial advice. It then provides definitions of stock options, vesting schedules, and exercise price. It explains that shares are not owned until options are both vested and exercised. The document discusses what early exercise entails, including filing an 83(b) election form and designating gains as long-term capital gains to receive tax benefits. It outlines the pros and cons of early exercise. Finally, it provides step-by-step instructions for employees who want to early exercise their options.

1. Stock Options and Early Exercise

2. How much tax you pay on them
is your personal decision.
You all have Stock Options.

3. Agenda
● Stock Options 101
● What is Early Exercise?
● Your choices for exercising
● How to’s

4. DISCLAIMER
We are not your financial advisors!
Nor are we your accountants or lawyers.
Feel free to consult your own financial advisor
to make the choice that’s right for you.

5. Stock Options 101

6. What is a Stock Option?
A Stock Option is the right to purchase stock in Lever.
● Amount of shares – the maximum number of shares you can purchase
● Vesting schedule – the timeline for earning options over time
● Exercise price – the cost of those shares, usually well-below future value.
FAQ Who sets the strike price?
Strike price is established by a third-party auditor through a process called a 409A valuation,
which we must do at significant value-changing moments like fundraising.

7. When do I own the shares?
Vested
All of Lever’s equity is on a standard 4-
year vesting schedule with:
● 1 year cliff
● Monthly vesting
thereafter
Exercised
“Exercising your options” means
buying your shares
● You literally pay Lever in
the process.
● Current strike price is
$___/share
Even though you’ve been granted an option, *you don’t own the shares* until
you’ve both:
+

8. What is dilution?
Dilution occurs when we grow the equity pool to grow Lever.
● Typically occurs at fundraising moments
● “Grows the pie” at the same time it adds shares to the pool. So, while the
percent you own may decrease, the value of your shares should increase.

9. Say you’re a co-founder of {Company}...
Incubator Your stake
Other {company} employees
Investors

10. Say you’re a co-founder of {Company}...
Incubator
Series A
Your stake
Other {company} employees
Investors

11. Say you’re a co-founder of {Company}...
Incubator
Series A
Series B
Your stake
Other {company} employees
Investors

12. Say you’re a co-founder of {Company}...
Incubator
Series A
Series B
Series C
Your stake
Other {company} employees
Investors

13. Say you’re a co-founder of {Company}...
Incubator
Series A
Series B
Series C
Your stake
Other {company} employees
50% worth $5 → 6% worth $1M
Investors

14. What is the value of my options?
IPO + stock trade Acquisition Private market trade
● Trick question: $0
● We have to reach a liquidity moment for you to exchange your
shares for any real money.

15. What determines the value of my options?
● Our success & future valuation at liquidity moment
● Total valuation, your stake and dilution
● Less how much you pay for the shares aka exercise price
● Less how much you pay in taxes ← This is where Early Exercise comes in

16. Early exercise
How the 83(b) form and process can save you money in taxes

17. What is Early Exercise?
Early Exercise entails claiming your equity as
Long-term capital gains in your taxes, meaning that:
● You must exercise (buy) your shares now – all or just a portion of them.
● You tell the IRS that you intend to Early Exercise and include your 83b form
when you file your taxes.
● Your equity is taxed as Long-term Capital Gains*, which is a lower rate than
Short-term (same as income tax). *there are some additional requirements here; more later

18. Optional Early ExerciseMandatory for everyone
Purchase options & EE
Buy shares, complete paperwork, submit a
signed copy of the 83(b) form to Lever.
Within 30 days of EE
Mail the IRS a letter indicating you’re going to
early-exercise and your signed 83(b) form
When you file taxes
Include another copy of the signed 83(b).
Receive grant
Lever grants you shares within ~30d because the
board approves in batches.
Accept options
You MUST accept your grants before you
exercise or leave Lever (if you’ve vested shares)
If you choose
to E.E.

19. Pros and cons of Early Exercise
Why do it?
● Save up to ~15% on
LTCG vs STCG
● Maximize the value of
your hard-earned equity
Why not?
● You’re paying cash
upfront – general
opportunity cost.
● There’s a risk that the
company fails or the
valuation tanks and you
lose that cash.

20. Some fine points on Long-Term Capital Gains
In order for LTCG to be valid, then at the liquidity moment:
● The grant date must be more than 2 years ago
● The exercise date must be more than 1 year ago
Otherwise, short-term capital gains will apply. (You won’t lose money; you just won’
t gain tax savings)

21. FAQ What if I leave Lever before I’m fully vested? Do I lose that money?
No. If you’ve paid Lever for early-exercising your shares, we write you a check to refund you the
difference of any unvested shares at the time of your departure.
In your stock option plan, this is described as Lever’s right to repurchase.
FAQ When do I pay taxes on my equity?
At the liquidity moment. For example say Lever IPO’d in 2020. Then, in July 2021, you’ve chosen to
sell your shares. You’d include the value of the stock trade in your 2021 taxes, where they’d be claimed
as long-term capital gains.

22. Your choices

23. No bad choices here :)
It’s all about your risk-reward appetite.
$$$ from potential
tax savings
Risk of losing
upfront $

24. Other personal factors
● Your confidence in Lever’s future value.
● How much you’d need to pay upfront and how affordable that feels for your
current lifestyle.
● Your general tax situation / income tax bracket.

25. 3 basic choices
1. Do nothing
Totally legit! You don’t have to up-front any money, but you pay normal taxes.
2. Exercise later
Wait and see how things go, but pay income tax on the diff between valuations.
3. Exercise now (all or a portion)
Tax savings up to ~15%, but you risk losing money if Lever is ultimately worth $0.

26. How to’s
The step-by-step to Early Exercising

27. OK, I get it!
….I’m thinking / deciding...

28. Yes!
I want to Early Exercise
all *or* just some of my shares.

29. 83b election form
(an IRS document)
Step 1
● Fill in the quantity of shares you want to exercise
● Write a check for the correct amount (made out to Lever, Inc.) and give
check and two forms to the People Team.
Get the paperwork:
Notice of Stock Option
Exercise
(a Lever document)

30. Step 2
Scan/print and sign 4 copies of the “Section 83(b) Election”
● Copy #1 – give to Lever
● Copy #2 – mail to the IRS WITHIN 30 DAYS
● Copy #3 – mail to the IRS WITHIN 30 DAYS
● Copy #4 – submit with your next tax filing

31. Step 3
Customize the
cover letter to the IRS.

32. Step 4
Send the following documents to the IRS via certified mail.
1. Customized template letter (SIGNED)
2. 83(b) election form (SIGNED - Copy #2)
3. 83(b) election form (SIGNED - Copy #3)
4. A self-addressed, stamped envelope for the IRS to send verification of receipt.
Within 30 days of Step 1 !!!
Dept of the Treasury
Internal Revenue Service
Fresno, CA 93888-0002
To:

33. Step 5
When you file your taxes
● Do not e-file* to submit your taxes (but you can still use TurboTax etc)
● Instead, print and mail your taxes and include the 83(b) Election
Form (Copy #4)
* You’ll need to physically mail your taxes in order to include this sheet of paper and cannot
do the last step of e-filing. To clarify, you *can* use TurboTax etc, but instead of hitting
“Submit and E-file” at the end, you instead choose the option of printing and mailing in
yourself.

34. FAQ
What if I totally miss the 30 day window????
Uhm, just try not to. In fact...

35. Team Post Office Trip
Month
31

36. Questions?

37. Still have questions?
We’re holding office hours.
● Friday at 10 am.
● 10 minute maximum per person - come prepared!
Resources
● Lever’s Stock Option plan: {{link}}
● Lever’s Employee Handbook: {{link}}

38. 1. Max Schireson’s blog on stock options,
http://maxschireson.com/2011/08/23/startup-stock-options-explained/
2. Really basic overview on the ‘why?’ of stock options,
http://money.howstuffworks.com/personal-finance/financial-planning/stock-options.htm
3. Account Talent, 83(b) Elections for Dummies, http://www.accountalent.com/?p=429
4. IRS Publication 525, Taxable & Nontaxable Income, http://www.IRS.gov/pub/irs-pdf/p525.pdf
5. Fairmark Press Statement on Non-qualified Stock Options, http://www.fairmark.
com/execcomp/nqo.htm
Further Reading