If you have startup stock options, check your option plan

Basically the way this works is that we give new employees an up front lump sum in the amount of how much it costs to purchase the shares of the company. The employee then purchases those shares from us in line with a vesting agreement. All warrants and conversions are exactly the same as the founders shares.

This means that they pay tax on this purchase as regular income rather than capital gains up front with the money we give them for it. This prevents a heavy tax bill at conversion and allows them to retain their vested shares regardless of if they work for us or not after the first 12 month vesting period.

We calculated that the up front taxes are magnitudes cheaper in the long run because the increased valuation will cover those differences handily and there is no waiting period like there is with capital gains tax.

In the end though our intention was to make a simple way for our employees to actually own the stock we give them as compensation and it not be something that they can lose or be restructured easily. If a VC or acquisition wanted to restructure that away for employees then they would be forced to restructure everyone's, so we are all in.

If you can arrange something more advantageous, by all means do it, but I think you're going to have a hard time negotiating away the cliff. Having the cliff ensures that employee has proved herself before getting a stake in the company, which most investors and founders believe is important.

Founders often end up in a situation where there is significant dilution and as the hockey stick changes into a slightly different shape they know that nobody's options are worth anything.

Founders with integrity will acknowledge this and make adjustments. Those without integrity pretend it isn't true and create a culture of secrecy around options grants/terms.'

Edit: You should also be able to do the math on what your options are worth fairly easily as funding rounds approach and valuations occur.

This is not true, or not necessarily. It's calculated for AMT, so if you're already paying AMT, or would be paying AMT with the addition of this income, then yes: You'll be paying that tax now. This is true for many in California with the high state taxes and a relatively high gross income (versus national averages).

However, if the intrinsic value portion of your exercise (i.e. fair market value minus your strike price) as an addition to your AMT worksheet does not indicate you'll owe AMT for the year, then you will NOT see a tax event. This will be true for many non-Californians exercising after their first year, or even after 4 years, depending on the growth of the fair-market-value.

If you are at risk of paying AMT and your intrinsic value is in the low 6-figures (or lower), one solution might be to wait until the beginning of a new tax year, exercise, and quit your job... then take a year off from wages and work for equity (i.e. form your own startup). You'll avoid paying the 26% on that money due at exercise. If you've been paying AMT in the past, you'll even get a tax credit at the end of the year. Obviously, this plan is not without risks, should only be carried-out if you believe in solid growth in the startup for which you own equity and believe in the ability of the new startup you're founding and/or joining. Also, and obviously, you should consult with an actual accountant before considering this crazy idea ;-)