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To add to all of this, most people really don't understand the tax implications of options (whether they're ISOs, NSOs, or not options at all but instead are RS

To add to all of this, most people really don't understand the tax implications of options (whether they're ISOs, NSOs, or not options at all but instead are RSUs). It's hard to explain those without looking at a person's individual situation (the company, the initial value, the current valuation, and the person's tax bracket), which is why there's not a lot of talk about them. But the taxation can very easily be the tipping point between "definitely worth it to exercise" and "definitely not worth it to exercise", so it's really important to understand them.

AnimalMuppet 10y ago
True. But it's also important to not view taxes as the thing in deciding what to do. I had options that I could exercise (at a big, publicly-traded company, so I didn't have the startup, no-liquidity issues to worry about). My options were worth quite a bit of money. I had already exercised enough to put me at the edge of the next incremental tax bracket. On about December 15, I was looking at it, and thought it was a really tempting price, but... taxes. I decided to wait for January. Three days later, our company made an offer on another company. The stock market didn't like it. Our stock went down. I lost more than the taxes would have been. Moral: When money is growing on trees, pick it. Disclaimer: That isn't always good advice. If the price had continued to go up, it would have been really bad advice. But too much focus on taxes is also bad advice.
- chimeracoder 10y ago
  > Moral: When money is growing on trees, pick it. The problem is that taxes can quite literally cause you to lose money. For example, exercising options (at a gain) is a taxable event whether or not the options are actually liquid. In fact, if you're an early employee and your startup has been very successful, you could literally be looking at a tax liability of tens or even hundreds of thousands of dollars, even if your strike price is only a couple thousand dollars. (That would be the case if you were a very early employee and the company was very successful - ie, the exact situation we think of as the "upside"). If you leave the company (voluntarily or not), you have 90 days to decide whether or not to exercise those options and pay the taxes immediately, even though you won't get to actually sell the underlying shares until a liquidity event happens. There's no guarantee that the liquidity event will give you the same (or higher) price, and even if those options tank, you don't get your taxes back. So, if those options subsequently tank to "only" double what they were worth when you joined the company as employee #1, you might think "hey, that's great - I made a 200% return on my equity". Except, you didn't - because the taxable amount was 100 times that - so you're deeply in the red. (These numbers are all made up, but the orders of magnitude I'm talking about are quite realistic under the parameters I described.)

AnimalMuppet 10y ago

True. But it's also important to not view taxes as the thing in deciding what to do. I had options that I could exercise (at a big, publicly-traded company, so I didn't have the startup, no-liquidity issues to worry about). My options were worth quite a bit of money. I had already exercised enough to put me at the edge of the next incremental tax bracket. On about December 15, I was looking at it, and thought it was a really tempting price, but... taxes. I decided to wait for January. Three days later, our company made an offer on another company. The stock market didn't like it. Our stock went down. I lost more than the taxes would have been. Moral: When money is growing on trees, pick it. Disclaimer: That isn't always good advice. If the price had continued to go up, it would have been really bad advice. But too much focus on taxes is also bad advice.

chimeracoder 10y ago
> Moral: When money is growing on trees, pick it. The problem is that taxes can quite literally cause you to lose money. For example, exercising options (at a gain) is a taxable event whether or not the options are actually liquid. In fact, if you're an early employee and your startup has been very successful, you could literally be looking at a tax liability of tens or even hundreds of thousands of dollars, even if your strike price is only a couple thousand dollars. (That would be the case if you were a very early employee and the company was very successful - ie, the exact situation we think of as the "upside"). If you leave the company (voluntarily or not), you have 90 days to decide whether or not to exercise those options and pay the taxes immediately, even though you won't get to actually sell the underlying shares until a liquidity event happens. There's no guarantee that the liquidity event will give you the same (or higher) price, and even if those options tank, you don't get your taxes back. So, if those options subsequently tank to "only" double what they were worth when you joined the company as employee #1, you might think "hey, that's great - I made a 200% return on my equity". Except, you didn't - because the taxable amount was 100 times that - so you're deeply in the red. (These numbers are all made up, but the orders of magnitude I'm talking about are quite realistic under the parameters I described.)