"they immediately owed taxes on options they had just exercised" On exercise yes, but not on issue. I think you're mixing up people buying their options (exerc

"they immediately owed taxes on options they had just exercised" On exercise yes, but not on issue. I think you're mixing up people buying their options (exercise) with issuance of the options. No taxes are owed at grant or vest on options, whether NSO or ISO. Upon exercise (buying - regardless of whether there's a sale) of NSO a tax is owed on the spread between the FMV (usually the 409a valuation, if pre-ipo) and the strike price at grant. This can be considerable and I'm sure is the tax event you're thinking of. Savvy employees with a cooperative employer often exercise at grant time -- before the options vest -- writing a check almost immediately after hire. This is an early exercise. If this takes place before the value changes (before the board updates the 409a valuation) then there is a taxable event but the spread is $0. The employee then follows up with an 83(b) election to notify the IRS that they wished to be taxed now, rather than later at vest, which ensures that income tax on the spread is never paid. It all becomes regular capital gains.