You're missing the role of the IRS and tax law here. In order to grant ISOs (Incentive Stock Options), which are taxed less unfavorably than NSOs (Non-qualifie

You're missing the role of the IRS and tax law here. In order to grant ISOs (Incentive Stock Options), which are taxed less unfavorably than NSOs (Non-qualified Stock Options), the strike price of the options must be equal to or above the "Fair Market Value" of the underlying stock. The "Fair Market Value" is usually determined by an independent valuation firm through a process called a "409A Valuation." Firms like SVB, Alvarez & Marsal, Capshare and others do this. The later-stage the company is, and the closer to IPO, the higher the 409A valuation will be. If a company were to grant below the fair market value, there would be several bad consequences: 1 - You would owe taxes on vesting -- this means you could owe taxes possibly as soon as the first day of work, and likely on your 1 year anniversary of work. You owe these taxes whether you exercise or not; 2 - The company would have to withhold income taxes on your exercise date, including "employer-side" payroll taxes. Normally, with an ISO exercise, you may face "AMT" (Alternative Minimum Tax) but you might not. By contrast, you certainly owe taxes with cheap NSOs. Blame the IRS.