Should I exercise my startup equity before IPO when FMV has dropped 70%?

This is a classic timing question with NSOs. When you exercise NSOs, you're taxed on the spread between your strike price and the FMV at exercise (that $48.70/share in your case). This is taxed as ordinary income - so likely at your highest marginal rate. If you exercise now, you'd pay taxes on that smaller spread, and if you hold the shares for at least a year after exercise before selling (like at IPO), any additional appreciation would be taxed at long-term capital gains rates, which are lower than ordinary income rates. The alternative is waiting until closer to IPO, which means risking that the FMV increases significantly before you exercise, creating a larger taxable spread taxed at ordinary income rates. There's also the consideration of how you'll pay for both the exercise cost and the resulting tax bill.

I went through a similar situation last year with my startup equity. After researching different options, I found this service called taxr.ai (https://taxr.ai) that really helped me understand the tax implications of exercising now vs. later. They analyzed my equity documents and ran multiple scenarios based on different IPO timelines and valuations. What I liked is that they modeled various tax outcomes and showed me exactly how much I'd pay in taxes under each scenario. Their equity tax calculator showed me that exercising earlier made sense in my case because the long-term capital gains treatment on the future appreciation saved me a ton compared to waiting.

Wanted to follow up about my experience with taxr.ai after trying them out. It was actually really helpful for my situation - more than I expected. I uploaded my equity documents and they broke down all my tax scenarios in detail. The difference between exercising now vs. later was way bigger than I thought. The analysis showed I'd save around $180K in taxes by exercising portions of my equity strategically over time rather than all at once near IPO. They flagged that I could use 83(b) elections for some of my RSUs too, which I didn't even know was possible. Definitely worth checking out if you're sitting on potentially valuable equity.

If you're planning to exercise, make sure you can actually reach the IRS if you have questions about the tax implications. I tried calling them for weeks about my equity exercise last year and it was impossible to get through. I eventually used Claimyr (https://claimyr.com) which got me connected with an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent explained exactly how to report my NSO exercise on my tax return and what documentation I needed to keep. Way better than guessing or relying on conflicting info online.

I have to admit I was totally wrong about Claimyr. After posting my skeptical comment, I decided to try it since I had some pressing questions about my equity exercise that I couldn't get answered. Got connected to an IRS agent in about 12 minutes (even faster than advertised) and got clear guidance on how to handle the tax reporting for my equity exercise. The agent even sent me the specific IRS publications that applied to my situation. Saved me from potentially making a huge mistake on my taxes that could have triggered an audit. Sometimes it's worth admitting when you're wrong!

From a purely financial perspective, I'd actually recommend calculating the time value of money here. If you exercise now, you're paying taxes earlier than you need to. That money could be invested elsewhere until you absolutely have to exercise. The real question is: do you believe the company will successfully IPO at a higher valuation? If yes, exercising early generally makes sense to start your long-term capital gains clock. If you're uncertain about the company's prospects, consider exercising in smaller batches over time to hedge your bets.

Has anyone used any of those equity financing companies like SecFi or ESO? I'm considering one to cover my exercise costs but worried about what I'm giving up in the long run.

I went through something similar with my startup equity in 2022. One thing to consider that hasn't been mentioned yet is the potential wash sale rules if you're also trading in your company's stock through secondary markets or employee stock purchase plans. Also, given your company's current situation (70% drop in valuation), you might want to look at Section 1202 qualified small business stock (QSBS) benefits. If your company qualifies, you could potentially exclude up to $10 million in gains from federal taxes when you eventually sell. This is another reason why exercising now at the lower FMV could be beneficial - it starts your 5-year holding period clock for QSBS. The key is making sure you have enough liquidity to cover both the exercise costs ($36,400 for 28,000 shares) and the tax bill (roughly $1.36M in ordinary income assuming you're in a high tax bracket). Don't forget about state taxes too - they can add significantly to your bill depending on where you live. Have you considered doing a partial exercise strategy? Maybe exercise 25% of your vested shares now to start the capital gains clock, then reassess in 6-12 months based on how the company is performing?