Turning Paper Wealth Into Real Wealth -- Without Giving It All Away to the IRS

The Street is raining millionaires: For those lucky enough to be working in so-called "New Economy" firms, the chance to cash in the generous incentive stock options, or ISOs, these firms have historically provided can be the windfall of a lifetime. During August, according to Edgar Online, the insiders at some 32 newly public companies will get their first chance to exercise incentive stock options.

But should they exercise or hold? And how do taxes influence this decision?

We'll get to that, but first, let's define a few terms.

Companies can offer their employees one of two different types of stock options: incentive stock options and nonqualified options. But nowadays most of the budding tech companies are handing out ISOs. ...