I have experience with early grant of non-ISO shares, which may be different from what you're asking about.
I was granted shares (on a vesting schedule) at the time of formation of the company. I paid tax up front on the entire potential share grant when the shares were valued at $0.000001/share, which was a reasonable valuation at the time (very high risk, no tech proof, no demonstrated market, etc.). Although I have a significant # of shares and a significant % of equity in the company, the tax I paid was quite affordable. See 83(b) election.
If it pans out and I sell my equity, I will pay long-term capital gains on the difference between the valuation at the time of my 83(b) election and the sale price. If it doesn't pan out, I'm not exposed to AMT or other tax weirdnesses that other posters have noted. I found this mechanism useful.
You were granted shares, similar to founder's stock. I'm talking about options, which have a strike price. In my scenario, you in effect exercise (buy) the shares before they vest, which is on its face kind of impossible. One way I've heard it done is you sign a letter authorizing the company to buy back the unvested shares if you leave -- in effect, you buy the shares, simultaneously giving the company an option to purchase them back, and that option vests backwards over time -- the longer you stay, the less shares they can buy back. Under this rubrick, you owe no taxes at all, since money flows from you to the company, therefore there is no taxable compensation. For the company, I assume it's like any investment round, they sold stock for working capital.
"One way I've heard it done is you sign a letter authorizing the company to buy back the unvested shares if you leave"
That is the only way I have heard of early exercise working.
"Under this rubrick, you owe no taxes at all, since money flows from you to the company, therefore there is no taxable compensation."
To be clear, the way this works is that the time of exercise you have income (AMT only for ISOs, regular income for other options) equal to the difference between the fair market value and your exercise price. So you owe no taxes if your exercise price is the fair market value, which is usually the case if you exercise soon enough after the options were granted. It's not about which way cash is flowing, it's about whether what you get back in exchange for the cash is worth more than the cash you are paying.
"I assume it's like any investment round, they sold stock for working capital."
I'm more hazy on this, but I don't think it would normally be similar to an investment round, because in an investment round typically new shares are issued; in this case you are buying shares that were previously issued for the employee stock pool.
I don't think there's any real difference between issuing new shares and selling shares from a pool. Shares can be issued but if they're not actually sold to anyone, I believe they have no effect on the capital structure of the company. Perhaps the issued shares have some effect on valuation metrics, but that's subjective voodoo anyways...
I was granted shares (on a vesting schedule) at the time of formation of the company. I paid tax up front on the entire potential share grant when the shares were valued at $0.000001/share, which was a reasonable valuation at the time (very high risk, no tech proof, no demonstrated market, etc.). Although I have a significant # of shares and a significant % of equity in the company, the tax I paid was quite affordable. See 83(b) election.
If it pans out and I sell my equity, I will pay long-term capital gains on the difference between the valuation at the time of my 83(b) election and the sale price. If it doesn't pan out, I'm not exposed to AMT or other tax weirdnesses that other posters have noted. I found this mechanism useful.