"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...
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.