Some are unqualified success stories, like the time my college roommate's father pulled up outside the college dorm in 1998 in a brand-new zippy BMW convertible (top down, naturally), and told us to come along for a ride.

As he drove away, engine roaring, the remark he tossed towards us, cracking a huge smile, was: "Boys, never forget: Optionsâ¦are good."

It felt that way in 1998.

The summer after that car ride, my roommate interned at a major investment bank, and on a very hot day, I visited him in Manhattan. A major topic as we walked around Central Park was how wrapped up he was in the EToys.com IPO.

By the fall of 2001, I was in a torts classroom in the middle of Silicon Valley, sitting next to a former EToys.com millionaire. The day after the IPO, he'd gone shopping for Porsches. During the six-month post-IPO lockup, EToys.com cratered. The Porsche never happened, and my friend lost $2 million on paper. As a 1L, he drove an early-90s-vintage Chrysler LeBaron convertible â and I respected his good sense of humor about the whole episode.

By spring 2003, a tweedy, erudite professor in my Corporate Acquisitions class interrupted the regularly scheduled programming about hostile takeovers (how's that for a an 80s throwback?) to offer unprompted, emphatic advice:

"Many of you sitting in this room will end up working as in-house counsel at startup companies, and you will receive options. I am telling you today that you will hear a lot of advice to the contrary, but this is what you must do: as soon as the options vest, exercise them, sell all the shares, and diversify. Just make a decision today that that's what you'll do, and your life will be easier."

We are shaped by the stories we hear, because they help us make sense of a complicated world.

Stories like the ones above from the left and right sides of the tech bubble's bell curve are entertaining, and pretty useful. How you react to them says a lot about your behavioral tendencies, and your risk preferences â which are critical decision elements about stock options and restricted stock.

Nonetheless, it's important to also have a robust objective framework when making key life cycle planning decisions about exercising stock options and selling shares: When to exercise? When to sell?

One of the best resources I've found on these questions that's accessible and useful for a motivated non-specialist is Wealthfront's blog archive on options and restricted stock units (RSUs). It's not surprising that Wealthfront would lead here, as they're located right in the heart of Silicon Valley and have a real brain trust executive and board team including professors at Princeton and Stanford's Graduate Business School.

On the "when to exercise your options" question, Andy Rachleff's post frames the issues really well.

Rachleff notes that taxes and the fraction of your net worth at risk are the most important variables in the options exercise decision.

Three different federal tax rates are in the background here:

The ordinary income tax rate on earned income (39.6% for the top bracket).

The lower long-term capital gains tax rate (20% for the top bracket).

The alternative minimum tax (AMT) rate of 28%.

Although it simplifies things considerably and leaves out important nuances, on a risk continuum moving from lowest risk to highest risk, your exercise and sale alternatives include:

Wait until the company is acquired or goes public, and sell shares immediately after exercising your options.

This is low risk for several reasons. First, you receive cash at the same time you incur a tax obligation. Second, you have almost no exposure to stock price movement during the very brief time you own the shares. Third, you don't have to invest capital to exercise the options until you receive sale proceeds.

These risk reduction benefits carry a tax opportunity cost: all your gains on the options will be taxed at (relatively high) ordinary income rates.

For incentive stock options (ISOs), wait until the company is acquired or goes public, exercise your options, and wait to sell shares for one year (and at least two years from the date of grant).

This is somewhat higher risk than the sell-on-exercise alternative above. First, the spread between the stock price at the time of exercise and the option exercise price will create income for AMT purposes.

Depending on other aspects of your tax situation, this AMT adjustment may or may not cause you to actually pay AMT â but if it does, it's a "phantom income" problem, because you'll owe AMT before you received cash sale proceeds.

Another risk element with a delay between exercising options and selling shares is exposure to stock price volatility. For many, the unsold block of shares will represent a substantial fraction of net worth, amplifying the risk of the concentrated stock position.

In return for these risks, however, this strategy offers an opportunity for the eventual sale of shares to be taxed at (lower) long term capital gains tax rates, rather than (higher) ordinary income rates.

For nonqualified stock options (NQSOs), exercise your options well in advance of an IPO or sale, make a Section 83(b) election, and wait to sell shares for one year (and at least two years from the date of grant).

This is relatively higher risk than the alternatives above. First, the spread between the stock price at the time of exercise and the option exercise will create ordinary income â and, likely, related phantom income issues. Second, the strategy entails a longer duration exposure to stock price volatility.

In return, however, this strategy offers an opportunity for a large portion of the value of option grants in excess of the $100,000 limit for ISOs to be taxed at (lower) long term capital gains tax rates, instead of (higher) ordinary income rates.

A variant on this strategy that is lower risk is a very early stage Section 83(b) election, ideally before the company's first Section 409(a) valuation, when the spread between the share price and option exercise price is negligible.

In that case, ordinary income that's realized is very small, phantom income issues are minimized, while still obtaining the advantages of long term capital gains treatment.

We've outlined the three tax rates that shape the option exercise and share sale decision, and shown three different strategies with increasing risks that can achieve progressively larger tax savings.

But the tax savings issues don't exist in isolation: they occur in a context of your overall net worth, life cycle stage, lifestyle expenses, and liquidity needs.

Rachleff offers good advice, with which I agree: he advises option holders not to risk more than 10% of their net worth by exercising options much before the expiration date.

I think you could broaden this advice by including in the 10% limit both the out-of-pocket costs incurred to exercise the options and the out-of-pocket costs to pay tax on "phantom" income before shares are sold.

I'd also qualify Rachleff's advice a bit further.

His 10% of net worth rule of thumb for a risk limit relating to early exercise of options is oriented towards people who are still part of the "high earning professional" class â employees who may be early stage, but aren't founders.

For founders and holders of enough options on a fully-diluted basis that they will be "dynastically wealthy" post-sale or post-IPO, setting aside the 10% of net worth limit may make sense, because the actual dollar variance associated with the difference between ordinary income and capital gains rates can be tremendous.

A different post by Rachleff offers a useful summary of alternative approaches for diversifying out of concentrated stock positions: buying put options, a "costless collar" involving sale of call options to fund the cost of buying put options, and a disciplined approach to scheduled selling.

Getting comfortable with the emotional aspects of balancing upside against potential loss takes time, so careful thought about the best options exercise and share sale strategy is something you should do well in advance of any sale or liquidity event.

For employees and founders holding significant options or RSUs, working with a talented CPA with experience in this area will likely be a very worthwhile investment.

After all, you're investing time, talent, and energy, and bearing substantial career and financial risk. Doing what you can to tilt the odds in your favor and reduce the government's unwanted, unhelpful role as your "silent partner" makes a lot of sense.