<<A friend joined a pre-IPO and has lots of pre-IPO stock options at about $0.75 each. The company is looking promising and the pre-IPO stock price may go to several dollars per share in the next venture funding round.>>

Congratulations to your friend...

<<My friend has the option of exercising his pre-IPO stock options now and was adviced to do so now so that when the company goes public he will not have a taxable event in exercising his stock options (just to get the stock to hold). The advice giver said that when exercising a stock option one needs to pay taxes on the difference between the granting price and the current stock price even though he doesn't sell them.

Is the above true and what are the options???>>

Yup...depending upon the type of option. It could be in the form of regular compensation (W-2) or the "bargain" element may be subject not to "regular" income taxes, but may be subject to the Alternative Minimum Tax. You can read more about this in the Taxes fAQ area at http://www.fool.com/school/taxes/taxes.htm

In order to get MUCH more information on stock options as compensation, and the types of options out there, check out the Fool Personal Finance Area and also the Fairmark tax site (http://www.fairmark.com)

TMF Taxes
Roy