AMT implications on exercise of unvested ISO options

Hi all,

Suppose I have 1000 unvested stock options of my company. I am vesting these shares every month and all these 1000 shares will be vested by year end.
These shares are ISO option priced at $1. The FMV is $20 now and I expect the stock price to be $30 by the year end.
I am planning to exercise these unvested options right now with the goal to sell before year end. This way I will not incur any AMT income of $19,000 (1000 * (20-1)). And I will get short term gains of $10,000 (1000* (30-20)) (that I can use to offset against my previous stock losses).

Now what happens if I need to terminate my employment with the company for some reason. If this happens then I have exercised 1000 options but since these are unvested, I will never be able to sell them.
Do I still incur an AMT income of $19000 on these stocks. Please note that these stocks never became mine because they remained unvested.

Will really appreciate if somebody can answer my question. Thanks so much for all the help.

Some companies allow you to exercise unvested options, its called early exercise and individual needs to file 83b to notify IRS.

You'd generally want to do it so you increase the time you've held the stock and, assuming it goes up, to maximize the portion you pay capital gains on versus the "amt amount" which is taxed higher.

To address the original question though, if you have purchased shares and you quit the company, the company must generally buy them back within a certain time period (30 days I would assume) or you own them. It should all be in the agreement you signed.

But, I'm not a lawyer.

I'm not sure why you would want to exercise right now. It sounds as if you are planning on selling by year end (2004). If so, the gain will be short term and holding period really doesn't matter.

By exercising now, you assume more risk. Yes the stock may go up but it may also go down. Why not consider waiting to exercise when you are ready to sell? At that point, you know what the gain is. If something bad happens and the stock slides, your not out anything.