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Stock compensation is taxed based on the value of the shares. When a person exercises shares, the person is taxed on the difference between the fair value at issue and the value at exercise. This is ordinary income. If the issue price was $.01, and the exercise price was $10, the ordinary income would be $10 - $.01 multiplied by the number of shares. If the shares have no public market, the person would have to pay taxes even though he/she cannot sell the shares because value has been given to the shares. The person pays capital gains taxes eventually when the shares are sold. If a person exercises and sells on the same day, the person has ordinary income on the day the shares are sold.
The company may make the vesting of the stock based on milestones, such as the completion of a certain amount of work.
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