If you are receiving equity in a startup, the most tax-efficient structure is often restricted stock or stock options that can be exercised early.
When the exercise price is still low, it may make sense to exercise the option as soon as possible. One way to do this is to negotiate for an early exercise feature. Early exercise allows you to purchase the shares when the option is granted, even though the shares remain subject to vesting, repurchase, or reverse vesting restrictions.
The advantage is that you begin holding the shares earlier, which may help start the clock for favorable tax treatment, including potential QSBS eligibility. For founders and early employees, that timing can be very important.
Of course, whether early exercise makes sense depends on the specific facts, including tax considerations and the company’s equity structure.