Pre-IPO ISO Exercise Timing: AMT vs. Liquidity
A case study for the classic pre-IPO dilemma: start the clock early vs preserve cash until liquidity.
Last updated: January 2026
The pre-IPO dilemma
Exercising early can minimize AMT and start long-term capital gains holding periods — but it can also require meaningful cash for illiquid shares with an uncertain outcome.
Case study: TechCo employee
| Factor | Details |
|---|---|
| Employee | Sarah, Senior Engineer |
| ISO grant | 50,000 shares at $1 strike |
| Current 409A valuation | $12/share |
| Expected IPO | 12–18 months |
| Expected IPO price | $25–$40/share |
| Salary | $180,000 |
| Filing status | Single |
Scenario analysis
| Scenario | Cash needed now | Tax outcome | Key trade-off |
|---|---|---|---|
| A) Exercise all now | High (exercise + potential AMT) | Potential AMT now; potential LTCG later | Illiquidity + AMT risk if IPO delayed/fails |
| B) Wait until IPO, same-day sale | $0 | Ordinary income at liquidity event | Higher tax rate but immediate liquidity |
| C) Phased exercise over 2 years | Moderate | Manage AMT thresholds; mix of LTCG + ordinary | More admin work, but more control |
“Spread × 28%” is a rough upper-bound heuristic. True AMT equals tentative minimum tax minus regular tax after applying the AMT exemption and phase-out. Always model precisely.
Decision framework
| Factor | Favors early exercise | Favors waiting |
|---|---|---|
| Cash availability | Can afford exercise + potential AMT | Limited cash reserves |
| Confidence in IPO | High confidence in timeline/price | Uncertain / delayed |
| Risk tolerance | Comfortable with illiquidity | Need certainty |
| Tax bracket | Lower bracket today | Already high income |
Never exercise all ISOs based solely on IPO rumors. IPOs can be delayed for years or cancelled entirely. The downside is real: cash outlay + potential AMT on shares that may never become liquid.
Recommendations (for this type of case)
- Model AMT impact under current income before exercising.
- Exercise early in the calendar year to preserve same-year disqualifying disposition flexibility.
- Consider a phased approach (e.g., 25–30% now), then reassess in 6 months.
- Ensure the 12-month holding period completes before lock-up expiration (if aiming for LTCG).
- Maintain separate cash reserves (e.g., 6+ months of expenses) outside exercise funds.