Early exercise refers to the practice of exercising stock options before they have fully vested. Please note that companies often do not allow early exercise, and one should check such individual’s stock grant documents with respect to this feature. Stock options grant the option holder the right to purchase company stock at a predetermined price, known as the “exercise price.” By early exercising, the option holder can become a stockholder and potentially benefit from any future increase in the stock's value. However, early exercise carries risks, as the option holder may lose all or part of their investment if the stock's value decreases. Early exercising can be done for both incentive stock options (ISOs) and non-qualified stock options (NSOs), but the tax implications and requirements may differ.

When an option holder chooses to early exercise a stock option, they gain certain stockholder rights. Generally, these rights include the ability to vote on matters related to the company, receive dividends if declared, and access company financial information. The option holder is treated as any other holder of the company's common stock, regardless of whether the shares have fully vested or not. However, it's important to note that the optionholder's rights may be subject to any restrictions or agreements outlined in the stock option plan or agreement.

In addition to the stockholder rights mentioned earlier, early exercising a stock option can provide the option holder with potential tax advantages and the opportunity to start the clock on certain holding periods. By exercising the options before they fully vest, the option holder may be able to minimize their tax liability by locking in a lower tax rate based on the current value of the shares. Furthermore, early exercising initiates the holding period required for long-term capital gains tax treatment, which can result in lower taxes upon selling the shares in the future if their value increases. Additionally, if the company qualifies as a qualified small business, early exercising can start the holding period for qualified small business stock, potentially leading to significant tax savings. However, it's essential to carefully consider the risks associated with early exercise, such as the possibility of the company's failure, limited liquidity in the private market, and the potential for share buybacks by the company if the option holder leaves before the options fully vest.