Arizona’s tech scene is busy, and so are employment contracts. If you work at a private company—startup or otherwise—you’re probably juggling acronyms (ISO, NSO, RSU), tax jargon, and a countdown clock that always seems to be ticking. This playbook focuses on the parts you control: the deadlines that matter, the taxes that surprise people, and practical moves to protect your upside.
What you actually own (before any deadline matters)
Options give you the right (not the obligation) to buy company stock at a fixed “strike” price by a certain expiration date. ISOs (incentive stock options) are a tax-favored version tied to employment status; NSOs (nonqualified stock options) don’t get the same federal tax break but are more flexible for employers. RSUs aren’t options at all; they’re promises to deliver shares on a schedule or trigger.
If the terminology still feels murky, skim a plain-English explainer on private companies’ stock options to lock down basics like vesting, exercising, and liquidity. You vest options over time. You exercise when you pay the strike price to turn options into shares. Liquidity—actually selling those shares—usually comes later (an acquisition, IPO, or a permitted secondary sale).
The three clocks most Arizona employees face
1) Vesting schedule. Often, a one-year cliff, then monthly or quarterly vesting. No taxes when options vest. Taxes come at exercise (NSO) or potentially later (ISO).
2) Post-termination exercise (PTE). Leave your job, and a short fuse starts—commonly 90 days—to exercise vested options before they expire. With ISOs, you generally must exercise within three months to keep ISO tax treatment; after that, many plans still allow exercise but treat the options as NSOs.
3) Option expiration. Most grants expire 10 years from the grant date (or earlier if your plan says so). That’s the long fuse. The PTE window is the short fuse.
Taxes without tears: ISO, NSO, and AMT in plain English
NSOs at exercise. The “bargain element” (fair market value minus strike) is ordinary income when you exercise. Future gains or losses after exercise are capital gains when you sell. The IRS outlines how stock options create compensation income and what gets reported on forms like W-2 and Form 3921; start with the IRS guidance on employee stock options for definitions and reporting basics.
ISOs at exercise. No ordinary income for regular tax, but that bargain element counts toward the Alternative Minimum Tax (AMT) in the year you exercise. If you later sell after meeting the holding rules (one year after exercise and two years after grant), the gain can be long-term capital gains for regular tax. To see how preference items feed AMT (and when credits can offset future AMT), review the IRS overview of the Alternative Minimum Tax.
Early exercise and 83(b). If your plan allows early exercise, an 83(b) election within 30 days can shift future growth to capital-gains treatment. This is highly situational—loop in a CPA before filing anything.
“Do I need cash to exercise?” 4 realistic paths
1) Pay cash outright. Clean and simple if strike prices are low and the fair market value (FMV) isn’t sky-high. Pro: no debt. Con: You’re tying up savings in an illiquid asset.
2) Exercise a smaller, strategic slice. It’s not all-or-nothing. If you have 10,000 vested options, consider 2,000 now and 2,000 next year to soften AMT risk and spread cash outlay while starting the long-term capital-gains clock.
3) Compare financing locally. If you’re weighing a personal loan, benchmark offers from Arizona institutions. AZ Big Media publishes lists that help you scan rates and membership rules, including top credit unions in Arizona and leading banks in Arizona. If the company underperforms, you still owe the loan—keep timelines and borrowing costs conservative.
4) Wait for a permitted sale. Some companies run tenders, have structured secondaries, or go public. When sales are allowed, SEC Rule 144 resale restrictions govern how restricted/affiliate shares can be sold—know the holding periods and conditions before assuming you can “sell to cover.”
Real-world Arizona snapshot (and how to reason through it)
Case: Laid-off engineer with 90 days.
- Facts: 4,000 vested ISOs at a $2 strike; latest 409A FMV is $8. Cost to exercise all: $8,000. Bargain element: $24,000.
- Options: (1) Exercise all likely AMT exposure; (2) Exercise 1,000–2,000 now to start the long-term clock and limit AMT; (3) Skip exercise and let them lapse.
- How to decide: Price the regret. If you believe a reasonable exit could happen within 2–4 years and you can afford a partial exercise without expensive debt, a tranche now spreads risk while preserving upside. If cash is tight, model the AMT hit and consider whether selling other assets (with a CPA’s input) beats borrowing.
Employment fine print Arizonans forget to read
Leaving a job can change more than your email signature. Non-solicitation, confidentiality, and bonus clawback terms can also shape your timeline—and sometimes your PTE window. As Arizona’s rules evolve, it’s worth skimming a local primer on what the new era of non-compete rules could mean for employers and workers. Even if your role isn’t covered, it’s a reminder that employment terms shift—your equity strategy should, too.
Before you exercise: a 20-minute pre-mortem
Stress test your “why.” Write down the specific milestone you’re banking on (e.g., “close Series C at a higher valuation,” “launch v2 with paying enterprise logos”). If you can’t name a plausible catalyst, consider a smaller tranche or waiting.
Quantify downside, not just upside. Add two lines to your notes: “What if the FMV falls 30%?” and “What if no liquidity event happens in five years?” Your plan should still make sense under both.
Know who approves what. Some companies require board or legal sign-off for early exercise, transfers into a trust, or sales under a tender. If timing is tight (e.g., a 90-day PTE clock), start any approval chain immediately.
Blackout windows exist at private firms, too. Even without public reporting, many growth-stage startups run quarterly blackout periods tied to financial closes or major launches. Ask HR or equity admin whether any internal policies affect the dates you’re considering.
Coordinate with payroll. For NSOs, your employer may withhold taxes at exercise or at settlement; for ISOs, there’s no regular-tax withholding, which is why AMT surprises happen. Either way, let payroll know your plan so forms and year-end reporting line up.
AMT modeling in plain English (no software required)
- Start with the bargain element you’re creating by exercising ISOs (FMV minus strike, times shares).
- Compare two paths: “exercise none” vs. “exercise X shares.” For the “exercise X” path, assume that the amount adds to your AMT base this year.
- If the AMT delta makes you uneasy, reduce X until the projected AMT fits your cash reserves. Remember, you can split across calendar years to smooth the impact and still start long-term holding periods.
Two more Arizona-flavored scenarios
Scenario D: Senior product manager, mixed grants.
- Facts: 5,000 ISOs at $3 strike (FMV $7) and 3,000 NSOs at $4 strike (FMV $7).
- Approach: Exercise some ISOs now to start the one-year clock, then hold the NSOs for a potential tender. If a company-sponsored liquidity window opens, you can decide whether NSOs make sense to exercise and immediately sell (if permitted), versus deferring.
Scenario E: Director with expiring options and a mortgage refi pending.
- Facts: 6,000 NSOs, $6 strike, $11 FMV; you’re mid-process on a refinance.
- Approach: Underwriters don’t love big, new unsecured debts or surprise tax liabilities. A phased exercise after the refi closes can keep your debt-to-income steady while still addressing option expiry risk. If you must exercise now, favor a smaller tranche that won’t derail loan approval.
Execution checklist for the week you act
- Reconfirm the latest 409A FMV and any plan amendments.
- Screenshot your vesting and grant details in the equity portal (grant IDs, expiration dates).
- Put your personal deadline on the calendar 10–14 days ahead of the official PTE or expiry date to allow for admin hiccups.
- Tell your CPA the exact date, share count, and FMV the same day you exercise.
- Save broker confirms, exercise receipts, and any Form 3921 you receive in a single folder labeled by tax year.
Bottom line for Arizona employees
Options can be a wealth-builder or a headache. You don’t have to bet the house to participate: understand your clocks, model the tax impact before you act, and pick a financing path that fits your real cash flow—ideally one that doesn’t leave you sweating a payment while you wait for liquidity. Do those three things, and your equity becomes a choice you’re making on your schedule, not a scramble against the calendar.
