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An Early Engineer's Guide to Early Stock Option Exercise
- thoreauway 9y agoThe spreadsheet with formulas is more helpful than I would have imagined (remember to look at the assumed constants tab).
- aveshcsingh 9y agoGlad you found it useful!
- throwaway2016a 9y agoMy problem has always been that startup pay is often below market and when you are already making below market, shelling out $20k to exercise is prohibitive. In my case that would mean spending more money than I put on the down payment of my house or pay for a year of my kid's daycare. With that said, if you can afford it it is a great way to lesson the tax blow in the event of an exit.
- Clubber 9y agoFrom what I understand, a banking or trading institution will execute the transaction, leaving you with the net for a moderate fee.
- throwaway2016a 9y agoI'd be curious to know about this. Do you or someone have more information? Every company I've been at it involves writing a check to the company unless the company is public. I don't know why a bank would take on the risk on a private company.
- Phanyxx 9y agoI 10/10 thought this was going to be about doing squats at my desk. Sigh.
- CalChris 9y agoThere’s no mention of Qualified Small Business Stock, QSBS. If you are early on, this is more important than 83b or early exercise although more difficult to manage. https://www.andersentax.com/services/for-private-clients/business-owners-and-entrepreneurs/qsbs https://www.andersentax.com/services/for-private-clients/bus...
- aveshcsingh 9y agoExcellent point, Chris. Founders should consider giving out RSUs instead of options for this reason. My understanding is that stock options do not count as Qualified Small Business Stock, however.
- CalChris 9y agoYou have to exercise that option first and then you have stock. That it is subject to a repurchase agreement (vesting) is a separate matter. QSBS is hard to achieve but the reward is much greater than 83b. Basically formation needs to be engineered with QSBS in mind. And you have to be early, pre-$50M. And ....
- j_s 9y agoQSB seems to be circling back into the limelight recently here: What Is QSB Stock and Why Does It Matter for Startups? | https://news.ycombinator.com/item?id=15495873 https://news.ycombinator.com/item?id=15495873 (2017Oct;21comments) <- content is 2016Jul grellas >When you do qualify, the benefit can be up to $2M Ask HN: How do I minimize the taxes from selling my startup? | https://news.ycombinator.com/item?id=2502623 https://news.ycombinator.com/item?id=2502623 (2011May;52comments) >proceeds of the original and the new investment are treated as long term capital gains [...] if the proceeds stay in a QSB for more than 5 years, the whole thing is tax free Tell HN: 100% exemption for angel investors extended through 2011 | https://news.ycombinator.com/item?id=2018041 https://news.ycombinator.com/item?id=2018041 (2010Dec;16comments) >grellas: My two cents ...
- CalChris 9y agoIt was created in 1993 but prior to 2009, it wasn’t worth anything. Now it’s worth quite a bit (thanks Obama!). https://static1.squarespace.com/static/5422fa91e4b09109bad5a2ee/t/59dfe60646c3c4f859b17021/1507845757071/chart12.png https://static1.squarespace.com/static/5422fa91e4b09109bad5a... http://www.founderscircle.com/what-startup-founders-and-employees-need-to-know-about-qualified-business-stock-qsbs/ http://www.founderscircle.com/what-startup-founders-and-empl...
- devy 9y agoI went to a workshop hosted by eShares Inc. regarding stock options a few years ago. They've since put it up on their blog. Highly recommended: https://blog.esharesinc.com/equity-101-stock-option-basics/ https://blog.esharesinc.com/equity-101-stock-option-basics/ Btw, if your employer haven't used eShares Inc for cap management, they should. It's much more streamlined with the electronic stock certificates and exercised (no messy paper trials to keep!)
- ellisv 9y agoFormer company uses eShares but current one doesn't :(
- deleted 9y ago[deleted]
- creaghpatr 9y agoReally great article. I hope the government repeals the AMT tax as expected in the coming tax cut bill. You are right that there is little material out there for resources.
- Lunar_Lamp 9y agoJust to be clear, though I'm sure it won't shock anyone, the article is very US specific and therefore it's entirely likely that parts of the advice will not carry over into other tax jurisdictions. I only comment this as I had assumed it was a more general article than dealing with the tax specific aspects of options.
- markcerqueira 9y agoExercise is in the post title and article title. Exercising = taxable event in most places I'm guessing.
- aveshcsingh 9y agoThat's true. The only part of this post that applies generally is the discussion of golden handcuffs; the rest is specific to US tax law.
- ellisv 9y agoAnother resource is https://github.com/jlevy/og-equity-compensation https://github.com/jlevy/og-equity-compensation (was posted here a couple years ago). It has the benefit of being "open source" so it might be easier to contribute to.
- onewayonly 9y agoGreat read- thank you!
- auspex 9y ago80% of startups fail and 20% succeed in some fashion. Which means if you normally make $50,000 and take a $5,000 paycut to work there you will lose $20,000 over the 4 year vesting period in salary. 80% of the time when the startup goes bust you make 0 on equity and still lost money due to the paycut. For a total of 8x20 or $160,000 loss. The two times you are successful you make 2xEquity. This means your equity has to be at least worth $80,000 each time you succeed.... just to break even with salary. Factoring in the risk of your equity being 0 you should be getting a LOT more equity. It's very similar to calculating expected value in poker.