Legal & Compliance
Alternative Minimum Tax (AMT)
A parallel tax system that can create unexpected tax liability when exercising incentive stock options.
The AMT is a parallel U.S. tax calculation that ensures taxpayers pay at least a minimum amount of tax. For startup employees, exercising ISOs can trigger AMT because the spread between exercise price and fair market value counts as AMT income, even though no cash is received.
In Practice
An employee exercises 10,000 ISOs at $1 when the 409A valuation is $10. The $90,000 spread triggers AMT, creating a potential tax bill of ~$25,000 on paper gains they can't sell.
Why It Matters
AMT has caused financial hardship for startup employees who exercised options in companies that later failed. Understanding AMT is critical before making exercise decisions.
VC Beast Take
AMT is the silent killer of startup equity dreams. Many employees learned this the hard way during the dot-com bust.
Related Concepts
Further Reading
Exercise or Wait? A Guide to Startup Stock Option Decisions
Should you exercise your stock options now or wait? The answer depends on taxes, risk tolerance, and your company's trajectory. Here's a framework for making the right call.
Startup Equity Compensation Explained: Stock Options, RSUs, and More
ISOs, NSOs, RSUs, restricted stock — startup equity comes in many flavors. Here's what each type actually means for your compensation, your taxes, and your financial future.
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