4 ms·

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

by 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])
idunno246 11y ago
Companies have to set the strike price based on the value of the company, which they must file with the IRS, and be able to defend(called a 409a). If youre pulling revenue you can't claim the company is worth no money...
harryh 11y ago
This is wrong. Stock options are almost university priced based on a 409A valuation of companies "fair market value" which is a legal requirement. If anything various tricks are played to somewhat lower the valuation # spit out by these valuations.

by marme 11y ago

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])

idunno246 11y ago

Companies have to set the strike price based on the value of the company, which they must file with the IRS, and be able to defend(called a 409a). If youre pulling revenue you can't claim the company is worth no money...

harryh 11y ago

This is wrong. Stock options are almost university priced based on a 409A valuation of companies "fair market value" which is a legal requirement. If anything various tricks are played to somewhat lower the valuation # spit out by these valuations.