I've been in that scenario, and honestly I can't imagine why any sane person wouldn't have them convert to NQSOs rather than the true poison of needing to exercise within 90 days. An extremely common scenario:
1. You work your ass off at a startup for years, but even after all those years the company is still not public and the stock isn't liquid.
2. You quit, so you have 90 days to decide if you want to cough up the cash to pay for those options, with no real way to sell.
3. Oh, don't forget the huge AMT bill you'll likely get that year.
4. Pray to God that company is eventually sold for more than all the liquidation preferences of the investors.
Would you rather have that or take the 24-37% potential tax hit (when you can actually sell your shares) vs 15% capital gains.
Also note you can write it so that the decision is totally up to the employee: exercise within 90 days and they're ISOs, after that either lose them or convert to NQSOs.
1. You work your ass off at a startup for years, but even after all those years the company is still not public and the stock isn't liquid.
2. You quit, so you have 90 days to decide if you want to cough up the cash to pay for those options, with no real way to sell.
3. Oh, don't forget the huge AMT bill you'll likely get that year.
4. Pray to God that company is eventually sold for more than all the liquidation preferences of the investors.
Would you rather have that or take the 24-37% potential tax hit (when you can actually sell your shares) vs 15% capital gains.
Also note you can write it so that the decision is totally up to the employee: exercise within 90 days and they're ISOs, after that either lose them or convert to NQSOs.