>That wouldn't work. "Paying the cost" would immediately result in taxable income to the employee

not to be combative, but why?

I'm not talking about a free lunch.

The options owner sells/trades the options for a future profit share. They don't make any income in this transaction (or receive any loan).

The 3rd party holds the shares from the exercised options. If they sell the shares for a profit, both the 3rd and engineer see income and pay taxes at this time.

If the shares are a loss, 3rd party has a loss and engineer sees nothing.

Edit...

Alternatively, the 3rd party and engineer make an s-corp and the 3rd party provides capital. S-corp loans the engineer cash and engineer sells shares to the S-corp. If the the shares sell below cost, the losses pass though to the engineer they can deduct the losses against the loan forgiveness