31 ms·

Does it really matter that much? If you're a first-50 employee, then maybe your shares will be worth a decent amount of money, but your exercise price will be

Does it really matter that much? If you're a first-50 employee, then maybe your shares will be worth a decent amount of money, but your exercise price will be very low (most likely). If you're not a first-50, your options probably won't be worth all that much anyways--is it really worth discarding working for a company based entirely on your exit strategy?

birdmanjeremy 11y ago
Unless I'm mistaken, even if your exercise price is low, you may still owe a crapton (technical term) in taxes if the company has a high enough valuation.
birken 11y ago
Yes, it does matter. If the stock has appreciated in value, your exercise price may be low but your AMT bill may be high even if you have no liquidity at all. In my case I paid more in AMT than I did to exercise all my shares, though both individually were large and incredibly risky investments. I could afford the risk and it did eventually work out for me, but some people can't afford the risk or frankly don't want to deal with the incredible complication of doing it. Just trying to figure out what your AMT bill might be involves doing your entire tax return based on projections, which depending on what time of year you are leaving could introduce quite a bit of inaccuracy and guesswork. If you have an extended exercise window you just don't have to worry about it. If you want to take the risk of early exercise to get better tax treatment, do it. But if you don't (which I suspect will be the majority of people), all of the complication goes away completely... just sit on your options and exercise-and-sell when/if you get a chance at liquidity.
- JonFish85 11y ago
  Fair point, and one that I had not considered at all. Thank you for pointing that out.
- timr 11y ago
  On the other hand, converting your options to NQSO means that you pay income tax on the spread at the time of conversion. This sucks equally badly in the situation you've described: you're stuck with a big tax bill, at your income tax rates, based on fictional income. The only good option (pardon the pun) here is to allow your employees to early exercise.
beambot 11y ago
It's not just the exercise price... it's the taxes on the illiquid gains that really fsck you! Eg. you're granted $100k in options over four years. You want to depart the company now, when the shares are worth 100x. You pay your $100k to the company to exercise, but now you also owe taxes on $9.9M in gains -- and you can't sell any of that stock to pay the $3.3M in taxes to the IRS. With a 10-year option, hopefully the company gets (or can offer) some liquidity to help you pay the IRS when you exercise later.
throwaway_goog 11y ago
I was employee # ~45,000 and my stock options were still worth ~$400K. Not exactly a startup, but startup employees stand to gain even more. Stock compensation benefits anyone who holds stock in a company that grows unexpectedly. The meme that it's worthless is because many startups don't actually grow. However, if the company isn't growing, why are you even working there?

birdmanjeremy 11y ago

Unless I'm mistaken, even if your exercise price is low, you may still owe a crapton (technical term) in taxes if the company has a high enough valuation.

birken 11y ago

Yes, it does matter. If the stock has appreciated in value, your exercise price may be low but your AMT bill may be high even if you have no liquidity at all. In my case I paid more in AMT than I did to exercise all my shares, though both individually were large and incredibly risky investments. I could afford the risk and it did eventually work out for me, but some people can't afford the risk or frankly don't want to deal with the incredible complication of doing it. Just trying to figure out what your AMT bill might be involves doing your entire tax return based on projections, which depending on what time of year you are leaving could introduce quite a bit of inaccuracy and guesswork. If you have an extended exercise window you just don't have to worry about it. If you want to take the risk of early exercise to get better tax treatment, do it. But if you don't (which I suspect will be the majority of people), all of the complication goes away completely... just sit on your options and exercise-and-sell when/if you get a chance at liquidity.

JonFish85 11y ago
Fair point, and one that I had not considered at all. Thank you for pointing that out.
timr 11y ago
On the other hand, converting your options to NQSO means that you pay income tax on the spread at the time of conversion. This sucks equally badly in the situation you've described: you're stuck with a big tax bill, at your income tax rates, based on fictional income. The only good option (pardon the pun) here is to allow your employees to early exercise.

beambot 11y ago

It's not just the exercise price... it's the taxes on the illiquid gains that really fsck you! Eg. you're granted $100k in options over four years. You want to depart the company now, when the shares are worth 100x. You pay your $100k to the company to exercise, but now you also owe taxes on $9.9M in gains -- and you can't sell any of that stock to pay the $3.3M in taxes to the IRS. With a 10-year option, hopefully the company gets (or can offer) some liquidity to help you pay the IRS when you exercise later.

throwaway_goog 11y ago

I was employee # ~45,000 and my stock options were still worth ~$400K. Not exactly a startup, but startup employees stand to gain even more. Stock compensation benefits anyone who holds stock in a company that grows unexpectedly. The meme that it's worthless is because many startups don't actually grow. However, if the company isn't growing, why are you even working there?