Here's the scenario:
I live and work in New York City.
On November 1, 2017 I get granted 80,000 ISO's that vest over four years (with a one year cliff). The strike price is $3.
On November 1, 2018 I've vested 20,000 of the options. Again, my strike price is $3. The FMV has grown from $3 to being $5 now.
Instead of paying cash out of pocket to exercise my vested options, I opt to utilize the following clause in the option agreement:
"Payment of the Exercise Price can be done by surrendering of other Shares which (i) shall be valued at its Fair Market Value on the date of exercise, and (ii) must be owned free and clear of any liens, claims, encumbrances or security interests, if accepting such Shares, in the sole discretion of the Administrator, shall not result in any adverse accounting consequences to the Company."
1 - What is the maximum # of shares I can own without spending any cash out of pocket?
2 - What will my tax liability be?