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Stock options are not complicated. Most people who look into the details of them will find them very plain and actually quite simple. The issue is you don't oft

by dkhenry 10y ago

Stock options are not complicated. Most people who look into the details of them will find them very plain and actually quite simple. The issue is you don't often deal with this area of finance so it looks foreign until you spend some time looking into the terms. Your options are a contract between you and the company for you to buy shares at a given price. If the value of the shares is worth more then you pay, the difference is income. "Value" is a 409a valuation ask your CFO what it when you execute. Enter the accountant who will tell you how much your liability is for that income ( it varies no more then a dozen other factors affecting your yearly taxes ) Your shares are illiquid, and likely worthless. VC's and other institutional investors have contracts with the company that means they will get paid well before and much better then you. This should really be the first point since you should have known this when accepting your compensation package.

hkmurakami 10y ago
Agreed. Takes maybe a few hours to understand the terms. BUT, most technical folks are very uninformed about investing and finance in general. Many brilliant engineers at my previous employers were utterly confused about their options as well as their decision making after IPO. So I think the difficulty also stems from a lack of development in financial acumen generally.
- dkhenry 10y ago
  +1 for development of financial acumen. We can often point to people taking out 18% APY car loans, or going to Payday loan vendors and say how silly they are for not understanding finance, but we turn a blind eye when its the finance that effects us ( even though one could argue that compounding interest on a payday loan is probably more complex then your basic stock option grant )
dfabulich 10y ago
> If the value of the shares is worth more then you pay, the difference is income. This turns out to be true, but I think it overlooks hidden complexity. 1) You'll find a bunch of stuff online that says you don't have to pay tax on that difference if you're getting ISOs. Options newbies who believe that ISOs have no tax burden, newbies who don't know that AMT is a thing, are going to have a bad time. 2) Since AMT is a thing, it's difficult ("complex") to use options safely, if only in the sense that it requires making a prediction about the future. Exercise early and you could lose your investment if the company fails. Exercise late but pre-IPO and you can find yourself in huge trouble, on the hook for hundreds of thousands in taxes with no way to sell your stock to pay your taxes. If you exercise post-IPO and sell on day one and you'll more tax than you would if you hold for a year. Making the right choice here can be difficult.

by dkhenry 10y ago

hkmurakami 10y ago

Agreed. Takes maybe a few hours to understand the terms. BUT, most technical folks are very uninformed about investing and finance in general. Many brilliant engineers at my previous employers were utterly confused about their options as well as their decision making after IPO. So I think the difficulty also stems from a lack of development in financial acumen generally.

dkhenry 10y ago
+1 for development of financial acumen. We can often point to people taking out 18% APY car loans, or going to Payday loan vendors and say how silly they are for not understanding finance, but we turn a blind eye when its the finance that effects us ( even though one could argue that compounding interest on a payday loan is probably more complex then your basic stock option grant )

dfabulich 10y ago

> If the value of the shares is worth more then you pay, the difference is income. This turns out to be true, but I think it overlooks hidden complexity. 1) You'll find a bunch of stuff online that says you don't have to pay tax on that difference if you're getting ISOs. Options newbies who believe that ISOs have no tax burden, newbies who don't know that AMT is a thing, are going to have a bad time. 2) Since AMT is a thing, it's difficult ("complex") to use options safely, if only in the sense that it requires making a prediction about the future. Exercise early and you could lose your investment if the company fails. Exercise late but pre-IPO and you can find yourself in huge trouble, on the hook for hundreds of thousands in taxes with no way to sell your stock to pay your taxes. If you exercise post-IPO and sell on day one and you'll more tax than you would if you hold for a year. Making the right choice here can be difficult.