My options (ISO's) in a privately-held (VC-funded) startup are slowly but surely vesting. Can I exercise the vested options? What does it mean to exercise options in a privately-held company? If it's allowed, how does AMT apply? Who determines the "fair market value" of stock in a privately-held company?
Generally it doesn't make sense to exercise vested options in a private company whilst you are still employed by the company. You would be spending money to exercise your options but without any guarantee that there will be any future liquidity. If for the sake of argument it would cost you $1000 to exercise your options now, it would still cost you $1000 in 4 years time if/when your company is trading. So why not just hang onto them and exercise them when you know there is a market?
There may be tax implications in exercising your options - ISO's are more tax efficient but I would seek advice on this. It is possible that because these are ISO's the fair market value doesn't come into it but again - advice needed here.
If you are leaving the company then you may want to exercise them because most stock option schemes are for employees and as soon as you leave the company you may not be allowed to exercise the option. But again, you are buying stock in a company that is not yet trading so beware.
Your company should advise you on how to exercise them. However you might be the first person that has tried to do this so they might need to go set up the process! But again, I'd ask the question 'do you really want to exercise them now?'
Update: Creating a market for privately held stock is possible through websites like Second Market. I wouldn't recommend this for new startups but if you are more established and the business can demonstrate a track record for delivering value, you could generate some liquidity for your private stock here.
In almost every case, yes, you can exercise (purchase) your stock options.
But, why would you?
At this stage, you cannot sell them (generally speaking sales are highly restricted pre-IPO, and they're not worth anything yet anyway), and there is always the probability that some other thing will happen to negatively affect their long-term value.
Personally, I've never seen the value in exercising stock options while you're still in the privately-held stage of the company. There is far more downside than upside in most cases. In certain scenarios, you can avoid short-term gains taxes by exercising then waiting 1+ years before selling them. This is still rarely worth the risk overall unless you are positive of the outcome, and it's going to save you a significant chunk of money (>$100K, IMO).
My unsolicited non-valued advice: Let your options continue to exist on paper. If you are contemplating leaving the company, it might make sense to explore exercising them. But then again, why would you leave if the stock was going to continue to increase in value? ;)