4 ms·

Simple question: Why not retire whole concept of stock options? Why not just give RSUs? More I read about how stock options work and how it can ruin you financi

by sytelus 11y ago

Simple question: Why not retire whole concept of stock options? Why not just give RSUs? More I read about how stock options work and how it can ruin you financially, I just don't think this whole thing is friendly to attract talent. I would be super hesitant to go to any company offering stock options instead of RSUs - no matter how good the offer looks on paper. Even though RSU value can go down to zero, you at least don't end up paying our of pocket. And things don't require 3 pages of explanations and caveats in your offer letter.

x0x0 11y ago
A (somewhat) secret: lots of employees don't/can't exercise, returning options to the pool. Hell, just last week someone was on HN discussing walking away from $0.5m because he couldn't afford to exercise when he left an employer that was later sold.
- vehementi 11y ago
  Why can't they take out loans for that purpose? Seems like free money for a bank
  - x0x0 11y ago
    At the required decision time, the employee often has no idea how much or when a company will be worth money. Plus the obvious risk that someone fucks up and the company is worth a lot less than planned.
    - ryandrake 11y ago
      So he didn't really "walk away from $0.5m". He walked away from a piece of paper that may or may not be worth $0.5m in some unknown time (or never) in the future.
      - x0x0 11y ago
        Had he been able to exercise he would have received that half million
        FireBeyond 11y ago
        Then and there? Then yes, no doubt he would have been able to get a loan from somewhere to cover this. He'd have had to eat some interest, perhaps. If not, then the parent's point - a ninety nine per cent "sure bet" is still not a one hundred per cent guarantee.
idunno246 11y ago
The ruining you financially is mostly on tax basis, and an RSU forces you to pay tax immediately on vesting as income, whereas an option lets you wait and choose when/how to pay taxes, and has some tax benefits depending.
- x0x0 11y ago
  Typically your employer would withhold a fraction of the just-vested RSUs to cover tax.
  - idunno246 11y ago
    Which means the employer needs, in cash, enough money set aside to cover the liability of ~35% of fmv(not strike) of all rsu issued. This really is unlikely to happen at an early company. What you really want, if you join at a point when you can afford to buy it, is to get options and buy and file 83b so you have zero tax owed.
- enra 11y ago
  Often when later stage companies start offering RSU there is a double trigger vesting. One is the normal vesting schedule where you earn the stock and the second is when the stock becomes liquid (acquisition, IPO). This way you wont get the tax hit until the stock is actually liquid. The downside is that you cannot get longterm capital gains tax treatment, instead it's taxed as ordinary income with your income tax bracket. Personally, I think all the tax optimizing on stock options doesn't seem worth it when most startup stock never see any returns. I wish IRS could find a way to fix this. It seems silly to pay taxes just because you own stock that is not liquid on any market and which you often can't even legally sell without company's permission.
  - idunno246 11y ago
    Whats frustrating is ISO fixes this exact situation, but AMT rules haven't really caught up with the current situation(they've barely changed since introduced iirc) - all they have to do is raise AMT to something more reasonable, or exclude ISO from AMT
marme 11y ago
the real problem is that options are meant to be given with a strike price so low they are basically given to you like RSUs, like 1 cent. Instead companies make the price much higher for no good reason other than to force you to be unable to execute it until the company goes public. If you have to sink a large amount of money to buy the shares and then are unable to sell them to pay the taxes most people wont exercise the option and will wait it out until the company goes public. People refer to this as the golden handcuff that prevents you from leaving the company because you lose your options 90 days after you leave the company. They then take your shares that should be rightfully yours as you worked there for years and give them to the next new hire. It is purely for the company to save money. Any company that has a strike price greater than 1 dollar is being greedy and it should be a red flag that they dont really want you to have those shares
- slapshot 11y ago
  You're missing the role of the IRS and tax law here. In order to grant ISOs (Incentive Stock Options), which are taxed less unfavorably than NSOs (Non-qualified Stock Options), the strike price of the options must be equal to or above the "Fair Market Value" of the underlying stock. The "Fair Market Value" is usually determined by an independent valuation firm through a process called a "409A Valuation." Firms like SVB, Alvarez & Marsal, Capshare and others do this. The later-stage the company is, and the closer to IPO, the higher the 409A valuation will be. If a company were to grant below the fair market value, there would be several bad consequences: 1 - You would owe taxes on vesting -- this means you could owe taxes possibly as soon as the first day of work, and likely on your 1 year anniversary of work. You owe these taxes whether you exercise or not; 2 - The company would have to withhold income taxes on your exercise date, including "employer-side" payroll taxes. Normally, with an ISO exercise, you may face "AMT" (Alternative Minimum Tax) but you might not. By contrast, you certainly owe taxes with cheap NSOs. Blame the IRS.
  - sokoloff 11y ago
    Blame Congress. They set the tax law; the IRS implements it. (This is not intended to be pedantic, but practical. You can vote on who sets the tax law. [at least most of us can])

by sytelus 11y ago

x0x0 11y ago

A (somewhat) secret: lots of employees don't/can't exercise, returning options to the pool. Hell, just last week someone was on HN discussing walking away from $0.5m because he couldn't afford to exercise when he left an employer that was later sold.

vehementi 11y ago
Why can't they take out loans for that purpose? Seems like free money for a bank
- x0x0 11y ago
  At the required decision time, the employee often has no idea how much or when a company will be worth money. Plus the obvious risk that someone fucks up and the company is worth a lot less than planned.
  - ryandrake 11y ago
    So he didn't really "walk away from $0.5m". He walked away from a piece of paper that may or may not be worth $0.5m in some unknown time (or never) in the future.
    - x0x0 11y ago
      Had he been able to exercise he would have received that half million
      - FireBeyond 11y ago
        Then and there? Then yes, no doubt he would have been able to get a loan from somewhere to cover this. He'd have had to eat some interest, perhaps. If not, then the parent's point - a ninety nine per cent "sure bet" is still not a one hundred per cent guarantee.

idunno246 11y ago

The ruining you financially is mostly on tax basis, and an RSU forces you to pay tax immediately on vesting as income, whereas an option lets you wait and choose when/how to pay taxes, and has some tax benefits depending.

x0x0 11y ago
Typically your employer would withhold a fraction of the just-vested RSUs to cover tax.
- idunno246 11y ago
  Which means the employer needs, in cash, enough money set aside to cover the liability of ~35% of fmv(not strike) of all rsu issued. This really is unlikely to happen at an early company. What you really want, if you join at a point when you can afford to buy it, is to get options and buy and file 83b so you have zero tax owed.
enra 11y ago
Often when later stage companies start offering RSU there is a double trigger vesting. One is the normal vesting schedule where you earn the stock and the second is when the stock becomes liquid (acquisition, IPO). This way you wont get the tax hit until the stock is actually liquid. The downside is that you cannot get longterm capital gains tax treatment, instead it's taxed as ordinary income with your income tax bracket. Personally, I think all the tax optimizing on stock options doesn't seem worth it when most startup stock never see any returns. I wish IRS could find a way to fix this. It seems silly to pay taxes just because you own stock that is not liquid on any market and which you often can't even legally sell without company's permission.
- idunno246 11y ago
  Whats frustrating is ISO fixes this exact situation, but AMT rules haven't really caught up with the current situation(they've barely changed since introduced iirc) - all they have to do is raise AMT to something more reasonable, or exclude ISO from AMT

marme 11y ago

the real problem is that options are meant to be given with a strike price so low they are basically given to you like RSUs, like 1 cent. Instead companies make the price much higher for no good reason other than to force you to be unable to execute it until the company goes public. If you have to sink a large amount of money to buy the shares and then are unable to sell them to pay the taxes most people wont exercise the option and will wait it out until the company goes public. People refer to this as the golden handcuff that prevents you from leaving the company because you lose your options 90 days after you leave the company. They then take your shares that should be rightfully yours as you worked there for years and give them to the next new hire. It is purely for the company to save money. Any company that has a strike price greater than 1 dollar is being greedy and it should be a red flag that they dont really want you to have those shares

slapshot 11y ago
You're missing the role of the IRS and tax law here. In order to grant ISOs (Incentive Stock Options), which are taxed less unfavorably than NSOs (Non-qualified Stock Options), the strike price of the options must be equal to or above the "Fair Market Value" of the underlying stock. The "Fair Market Value" is usually determined by an independent valuation firm through a process called a "409A Valuation." Firms like SVB, Alvarez & Marsal, Capshare and others do this. The later-stage the company is, and the closer to IPO, the higher the 409A valuation will be. If a company were to grant below the fair market value, there would be several bad consequences: 1 - You would owe taxes on vesting -- this means you could owe taxes possibly as soon as the first day of work, and likely on your 1 year anniversary of work. You owe these taxes whether you exercise or not; 2 - The company would have to withhold income taxes on your exercise date, including "employer-side" payroll taxes. Normally, with an ISO exercise, you may face "AMT" (Alternative Minimum Tax) but you might not. By contrast, you certainly owe taxes with cheap NSOs. Blame the IRS.
- sokoloff 11y ago
  Blame Congress. They set the tax law; the IRS implements it. (This is not intended to be pedantic, but practical. You can vote on who sets the tax law. [at least most of us can])