On the other hand, converting your options to NQSO means that you pay income tax on the spread at the time of conversion. This sucks equally badly in the situat

On the other hand, converting your options to NQSO means that you pay income tax on the spread at the time of conversion. This sucks equally badly in the situation you've described: you're stuck with a big tax bill, at your income tax rates, based on fictional income. The only good option (pardon the pun) here is to allow your employees to early exercise.