This is pretty much what happened to a lot of people in the valley during the dot-com bubble pop - your stock losses could be carried forward until the heat death of the universe, but you paid on 100% of the (illusory) gains.
For most, the issue was exercising their options. This is a tax event -- and the tax is owed on the difference in your strike price and the current price of the stock. If you find yourself in this situation -- immediately sell enough stock to cover the tax.
If you are given stock -- that is the tax event. You need to have enough cash to cover taxes on stock given to you -- if the stock is illiquid, and this is a bonus or something, then you should ask for part of the bonus to be in cash (to cover tax). If the stock is liquid, immediately sell enough to cover tax.
If you are a founder, and your stock just goes up in price, that is not a tax event.
Being given at-the-money options is not a tax event. You only owe <s>stock</s> tax once you exercise.
IANAA (not an accountant)
EDIT: replace "stock" with "tax" in the second to last paragraph
But I had to wait 6 months to sell any stock (SEC rule 144, applies to anyone whose shares were not bought), during which buying company share crashed 75% unrelated to this deal.
Now, since the deal happened to be in the first 6 months of the year, I was able to net it all, and a 3x exit was reduced to ~1.5x thanks to rule 144
If the deal had happened just 3 months later (any day after 1-jul), I would have lost money - not even full return of capital - on a successful exit, and had losses to carry till the end of the universe.
The tax laws are the problem. I have a good accountant, but wasn't in the driver seat for this deal, so I couldn't properly structure it.
This is the exact thinking that got many people in trouble during the dot.com bubble.
They exercised their options and neglected to sell and hold enough capital to pay their tax obligation.
Then the bubble burst and stock prices dropped, in some cases to nothing, within a year. The IRS still wanted the capital gains taxes on the difference between the option's grant price and the stock price on the day the options were exercised (aka the taxable event).
It was not uncommon to have people loose their houses and have their wages garnished to pay off their taxes.
Consider this a cautionary tale when speculatively trading Bitcoin.
The general idea behind rule 144 very sane: It's supposed to limit pump-and-dump IPOs and M&As, by forcing anyone who did not pay for their shares outright to wait 6 months before they can gain anything (and legally, the SEC is only interested in the overall guarantee - e.g. put options that guarantee you don't lose are AGAINST the current spirit and the former letter of the law).
However, the laws apply equally to someone who owns 90% of the shares (who is in a position to abuse an IPO and M&A) and 0.1% of the shares (who is likely an employee receiving RSU or options, has zero control, and likely not even any finances to draw upon)
The tax law is insane, the security regulations are complicated, and their interplay is ludicrously insanely crazy.
Whenever you see people saying "oh, it's very simple - you just didn't get the right advice" you can be sure that they have no idea what they are talking about - either they didn't have to deal with it, or they weren't aware they were doing something illegal.
However, it's still a VERY good idea to do if you plan on holding stock.
I know stories of several people who were exercised options on 7 figures of stock, only to see the price collapse before they were able to sell. The taxes they owed because of that eclipsed their net worth several times over.
It is crazy, but it is that way.
Exercise-and-hold is a bad idea for most people in most cases.
After that you're only taxed on gains. If you sold on the day of reception, then your gains/losses are likely minimal. Eg, receive at 50 sell at 50 = 0 gains/losses. Sell at 51 and you have $1*N gains. Those gains are taxed at a higher rate until a year after the stock appeared in your account. I think the difference is ~10% (35 vs 25 or so).
So there are definite tradeoffs between holding for the year vs selling immediately. This part is no different than buying/selling on the stock market.
tldr; yes, but not exactly
Whenever I have exercised an option, my taxes have included an AMT calculation based on adding in the difference in value between exercise price, and market price, of those options as additional ordinary income. When the AMT tax calculation yields a 'tax owed' number that is larger than the non-AMT version (which it always did when exercising shares to make down payments) the IRS asked for the bigger number. Meaning that even if I had not sold the shares I exercised, the IRS wanted me to pretend that I had and pay tax on that money that I was pretending to have received. In exchange for doing that, the tax basis becomes the market price at the time of exercise.
If you don't actually sell the stock (because, for example, you are waiting for escrow to close), and the stock value goes down significantly, you can reach a point that the value of the stock drops below the tax liability you incurred by exercising the stock option in the first place. In some cases the stock can become worthless. (my best score has been $120/share stock going down to $0.52 share) If you realize this is going to happen before the tax year is over you can dump the stock take the loss and it all works out in the wash (loss cancels gain). If you cross over a tax year boundary then you owe the tax anyway (even though you don't have a way to pay it) and when you sell the stock in the following tax year you get a 'loss' but you don't have any gains to offset that against and you can't just take it out of the taxes owed. You can however write it off, $3,000 per year against your ordinary income.
Some companies allow you to file an 83b election, which is to exercise all your stock immediately, and as it is worth exactly what you are paying for it, no taxable event, and then take ownership of it as it vests. A person might choose to do that because in the event of going public or any time when the common stock becomes liquid, you would only pay long term capital gains rather than short term gains. The downside is that if the company exits where the common stock is worthless (not an uncommon occurrence for startups) then you would lose that money you paid originally. (but you could write off that loss, $3,000 a year, against future income :-)
You don't, for example, usually get meaningful voting rights with those shares.
(And as kalkin observes, if you're leaving the company with in-the-money options.)