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At the time of exercise, they withheld around 39% (state, federal, fica, etc). As I understand it, I am now liable for an additional 20% (total ~59%), meaning I only get 41%. right?

For the example you gave - option granted at $4.00; FMV at time of option grant at $5.00 - you would be liable for 20% of the difference between the $5 and the $4, not 20% of the total price. The 'deferred compensation' is the discount that was given.

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