Offered "Founding Engineer" (3.5% Equity) at Pre-Seed Startup. How should I structure this to minimize taxes (ISOs vs RSAs)? I will not promote
Hey everyone,
I’m looking for some advice on how to structure my equity package at a very early-stage startup. I have the flexibility to ask the company to modify my offer letter, so I want to make sure I get this right before the upcoming funding round closes.
The Background
Company Status: Pre-seed stage, currently sitting at around $110k ARR. They are actively moving to close their official pre-seed round soon.
My History: I’ve been working with them as a contractor for the last 2 months.
The Promotion: Once the pre-seed round completes, they want to bring me on full-time as a Founding Engineer (I am employee #2, right after the CEO).
The Current Offer
Base Salary + 3.5% equity in ISOs (Incentive Stock Options).
My Dilemma & Goals
Because the company is so early-stage, I want to optimize for the lowest possible tax hit (specifically avoiding the Alternative Minimum Tax / AMT) and maximize my upside. I know that right now, the company's valuation and strike price should be incredibly low, but that will change once the pre-seed round officially closes.
I’m confused about whether I should stick with ISOs, push for RSAs (Restricted Stock Awards), or look into an early-exercise structure.
My Questions for the Community:
ISOs vs. RSAs at this stage: Since we are pre-seed and the valuation is low, should I push for RSAs (Restricted Stock Awards) instead of ISOs? My understanding is that RSAs would let me own the shares outright immediately (subject to vesting/repurchase terms) at a rock-bottom valuation.
Minimizing AMT / Tax Hit: If I stick with ISOs, what is the best way to structure them to avoid AMT? Should I ask for Early Exercise ISOs and file an 83(b) election immediately?
Timing the Strike Price: Can/should I ask to sign the offer letter and execute the equity portion before the pre-seed round officially closes? I want to lock in the absolute lowest 409A valuation/strike price possible before the new funding bumps up the company's valuation.
Is 3.5% reasonable? As employee #2 (Founding Engineer) at $110k ARR going into a pre-seed round, does 3.5% sound standard, or should I negotiate for more given the early stage and risk?
Would love to hear from any founders, early startup hires, or tech tax professionals on how you would handle this. Thanks in advance!