5 ms·

IMO it's best to regard stock options as worthless, even though that's not technically true.

kevingadd 11y ago
Unless the company is already public (so you can sell the shares), cashing in your options as an ordinary employee is a catastrophically bad decision. Even when it goes public you can be in for a world of hurt - a couple folks I know held Zynga shares at the point where the company went public and they ended up with a massive tax bill that they couldn't sell shares to pay off.
- Florin_Andrei 11y ago
  > a couple folks I know held Zynga shares at the point where the company went public and they ended up with a massive tax bill that they couldn't sell shares to pay off. What exactly is the combination of factors that produces that outcome?
  - kevingadd 11y ago
    When you convert your options to shares you pay the taxes. I'm not sure precisely why they converted at that point in time; it's possible it was in their employment agreements or part of the terms of the IPO. It may have been as simple as 'this stock price is going to go up after we go public, so it's in your best interest to buy the shares now'.
    - Florin_Andrei 11y ago
      > It may have been as simple as 'this stock price is going to go up after we go public, so it's in your best interest to buy the shares now'. That's what I thought. Exercised too early.
  - jpdaigle 11y ago
    Could be a 6 month lock-up period during which the employees who exercised and now hold stock (and thus have a huge tax liability) cannot trade (buy or sell) in the stock. So for 6 months you can be entirely at the mercy of the public markets, watching helplessly from the sidelines as the price crashes. (And yes, the solution is to not exercise until you're able to sell.)
    - georgemcbay 11y ago
      I have no knowledge of Zynga, but this is exactly what I've seen happen in other instances. Lock-up period combined with people exercising ASAP to optimize for reduced capital gains taxes due to the one year window between exercising and selling. The fear of paying more taxes (or waiting longer for the 1 year period after exercising) causes a significant amount of people to expose themselves to a potentially devastating downside by exercising ASAP. While this seems like a silly thing to do (and it is, IMO) it has to be seen in the context of a company full of people experiencing (often for the first time) what seems like it will be a very successful "exit" and everyone in the company is in euphoria mode, counting their Lamborghinis before they are hatched. Of course, after you see the results of this happening the first time you get to be the Debbie Downer who warns people of the possible downside in subsequent companies. IME this is a tough position to be in because you look like a negative asshole when everyone else is in party mode (often being egged on by upper management selling the dream).
    - lutorm 11y ago
      Well, in this case arguably the solution is not to exercise if you can't pay the tax bill, absent selling your stock. Exercise early, pay little tax because the FMV is low. Exercise late, pay lots of tax because the FMV is high. Exercise late and sell, pay lots of short-term cap gains tax. Exercising late, while still unable to immediately sell some shares to cover the tax bill you know will come seems like taking a huge risk.
  - bwoj 11y ago
    I worked for a company that went public at $18/share in 2000. During the lockup period the price of the stock went as high as $202/share. Over the next two years, the price trended downwards to around $20/share. Pre-IPO employees were encouraged to pay for shared before they vested. The idea here is that you can hold those options for 5 years and get capital gains rates on that appreciation which for small companies was 10%. I.E, you pay now, shares vest later. According to the AMT, you will owe taxes on those shares equal to the market price when they become yours minus what you paid for them. That is, when the stock vests. Not when you pay for it, and not when you sell it. So you can buy 1000 pre ipo shares for $1 each. Company goes public hits $100/share. You think it's going higher so you hold. Shares drop to $10. Now you're in a pickle. You owe taxes on 1000 shares * $99 of gain. But you're only sitting on 1000 shares * $9 of gain. When somebody finds themselves in this situation, they must sell those shares before that tax year ends, which means you're now paying income taxes instead. If your tax year has ended you are out of luck. The one thing that stops this from being a real problem for most founders is the IRS 83(b) form, which is to notify the IRS that you want to recognize the income associated with your option when you buy it as opposed to the default which is when it vests. Why doesn't everyone file their 83(b)? Clearly, the risk here is too complicated for many to understand and it's a very unusual situation to arise. Here is the story of how our CFO(!) at that company ran into this exact problem to the tune of $316,040 tax liability for shares he bought with money borrowed from the company(!): https://www.washingtonpost.com/archive/business/2000/07/02/keep-the-tax-man-away-from-your-stock-option-gains/7070006d-f6ee-47c1-97d9-ae98c540e2c7/ https://www.washingtonpost.com/archive/business/2000/07/02/k... Some references: https://www.nceo.org/articles/stock-options-alternative-minimum-tax-amt https://www.nceo.org/articles/stock-options-alternative-mini... https://blog.wealthfront.com/always-file-your-83b/ https://blog.wealthfront.com/always-file-your-83b/
chasing 11y ago
Well, they're financial instruments. And like any financial instruments, they need to be understood. I'm not sure most people understand how stock options work.
- w1ntermute 11y ago
  Exactly, it's silly to say they're worth nothing. That's like staying stocks you buy are worth nothing because the value could drop to 0. It's a matter of understanding what the probable outcomes are.
  - walshemj 11y ago
    quit right some times they have a negative value (after tax)
  - exolymph 11y ago
    Agreed. However, the human mind doesn't cope well with probabilities, so I think letting yourself believe that stock options are worth nothing is a good intellectual shortcut.
    - khuey 11y ago
      The real disaster scenarios come not from when they're worth nothing, but when they're worth less than nothing.
  - codeonfire 11y ago
    They are probably worth nothing. In a couple jobs the company had two sets of options with different strike prices. The high priced ones went to employees and the low priced ones went to execs and investors. Of course the stock was offered at a price in between and employees got to wipe their ass with the worthless options.
- superuser2 11y ago
  I think in those context "consider them worthless" means "budget as if they don't exist, mentally allocate them if and only if you successfully cash them out."
angryasian 11y ago
not worthless but the entire system that is meant to reward early employees, is set up to make that as hard as possible.
reality_czech 11y ago
It's best to regard money as worthless, too, since its value could drop at any point. In fact nothing has any worth except the bowl of soup you are currently eating, and the cardboard box above your head to keep out the rain. Just ask this homeless guy outside. Just ask him, seriously.

Unless the company is already public (so you can sell the shares), cashing in your options as an ordinary employee is a catastrophically bad decision. Even when it goes public you can be in for a world of hurt - a couple folks I know held Zynga shares at the point where the company went public and they ended up with a massive tax bill that they couldn't sell shares to pay off.

Florin_Andrei 11y ago
> a couple folks I know held Zynga shares at the point where the company went public and they ended up with a massive tax bill that they couldn't sell shares to pay off. What exactly is the combination of factors that produces that outcome?
- kevingadd 11y ago
  When you convert your options to shares you pay the taxes. I'm not sure precisely why they converted at that point in time; it's possible it was in their employment agreements or part of the terms of the IPO. It may have been as simple as 'this stock price is going to go up after we go public, so it's in your best interest to buy the shares now'.
  - Florin_Andrei 11y ago
    > It may have been as simple as 'this stock price is going to go up after we go public, so it's in your best interest to buy the shares now'. That's what I thought. Exercised too early.
- jpdaigle 11y ago
  Could be a 6 month lock-up period during which the employees who exercised and now hold stock (and thus have a huge tax liability) cannot trade (buy or sell) in the stock. So for 6 months you can be entirely at the mercy of the public markets, watching helplessly from the sidelines as the price crashes. (And yes, the solution is to not exercise until you're able to sell.)
  - georgemcbay 11y ago
    I have no knowledge of Zynga, but this is exactly what I've seen happen in other instances. Lock-up period combined with people exercising ASAP to optimize for reduced capital gains taxes due to the one year window between exercising and selling. The fear of paying more taxes (or waiting longer for the 1 year period after exercising) causes a significant amount of people to expose themselves to a potentially devastating downside by exercising ASAP. While this seems like a silly thing to do (and it is, IMO) it has to be seen in the context of a company full of people experiencing (often for the first time) what seems like it will be a very successful "exit" and everyone in the company is in euphoria mode, counting their Lamborghinis before they are hatched. Of course, after you see the results of this happening the first time you get to be the Debbie Downer who warns people of the possible downside in subsequent companies. IME this is a tough position to be in because you look like a negative asshole when everyone else is in party mode (often being egged on by upper management selling the dream).
  - lutorm 11y ago
    Well, in this case arguably the solution is not to exercise if you can't pay the tax bill, absent selling your stock. Exercise early, pay little tax because the FMV is low. Exercise late, pay lots of tax because the FMV is high. Exercise late and sell, pay lots of short-term cap gains tax. Exercising late, while still unable to immediately sell some shares to cover the tax bill you know will come seems like taking a huge risk.
- bwoj 11y ago
  I worked for a company that went public at $18/share in 2000. During the lockup period the price of the stock went as high as $202/share. Over the next two years, the price trended downwards to around $20/share. Pre-IPO employees were encouraged to pay for shared before they vested. The idea here is that you can hold those options for 5 years and get capital gains rates on that appreciation which for small companies was 10%. I.E, you pay now, shares vest later. According to the AMT, you will owe taxes on those shares equal to the market price when they become yours minus what you paid for them. That is, when the stock vests. Not when you pay for it, and not when you sell it. So you can buy 1000 pre ipo shares for $1 each. Company goes public hits $100/share. You think it's going higher so you hold. Shares drop to $10. Now you're in a pickle. You owe taxes on 1000 shares * $99 of gain. But you're only sitting on 1000 shares * $9 of gain. When somebody finds themselves in this situation, they must sell those shares before that tax year ends, which means you're now paying income taxes instead. If your tax year has ended you are out of luck. The one thing that stops this from being a real problem for most founders is the IRS 83(b) form, which is to notify the IRS that you want to recognize the income associated with your option when you buy it as opposed to the default which is when it vests. Why doesn't everyone file their 83(b)? Clearly, the risk here is too complicated for many to understand and it's a very unusual situation to arise. Here is the story of how our CFO(!) at that company ran into this exact problem to the tune of $316,040 tax liability for shares he bought with money borrowed from the company(!): https://www.washingtonpost.com/archive/business/2000/07/02/keep-the-tax-man-away-from-your-stock-option-gains/7070006d-f6ee-47c1-97d9-ae98c540e2c7/ https://www.washingtonpost.com/archive/business/2000/07/02/k... Some references: https://www.nceo.org/articles/stock-options-alternative-minimum-tax-amt https://www.nceo.org/articles/stock-options-alternative-mini... https://blog.wealthfront.com/always-file-your-83b/ https://blog.wealthfront.com/always-file-your-83b/

chasing 11y ago

Well, they're financial instruments. And like any financial instruments, they need to be understood. I'm not sure most people understand how stock options work.

w1ntermute 11y ago
Exactly, it's silly to say they're worth nothing. That's like staying stocks you buy are worth nothing because the value could drop to 0. It's a matter of understanding what the probable outcomes are.
- walshemj 11y ago
  quit right some times they have a negative value (after tax)
- exolymph 11y ago
  Agreed. However, the human mind doesn't cope well with probabilities, so I think letting yourself believe that stock options are worth nothing is a good intellectual shortcut.
  - khuey 11y ago
    The real disaster scenarios come not from when they're worth nothing, but when they're worth less than nothing.
- codeonfire 11y ago
  They are probably worth nothing. In a couple jobs the company had two sets of options with different strike prices. The high priced ones went to employees and the low priced ones went to execs and investors. Of course the stock was offered at a price in between and employees got to wipe their ass with the worthless options.
superuser2 11y ago
I think in those context "consider them worthless" means "budget as if they don't exist, mentally allocate them if and only if you successfully cash them out."

angryasian 11y ago

not worthless but the entire system that is meant to reward early employees, is set up to make that as hard as possible.

reality_czech 11y ago

It's best to regard money as worthless, too, since its value could drop at any point. In fact nothing has any worth except the bowl of soup you are currently eating, and the cardboard box above your head to keep out the rain. Just ask this homeless guy outside. Just ask him, seriously.