4 ms·

Since most ISOs permit early-exercise, isn't this a moot point? (if a given ISO permits exercise upon issue, since the value of a newly issued ISO must be zero,

Since most ISOs permit early-exercise, isn't this a moot point? (if a given ISO permits exercise upon issue, since the value of a newly issued ISO must be zero, then this $100K cap is not an issue?) > In particular, under the current tax rules, the total aggregate fair value of ISOs that become exercisable for an individual employee for the first time within a calendar year may not exceed $100,000. ISOs that fail to comply with this provision are treated as non-qualified stock options. Companies with higher valuations would easily hit this threshold for executives and highly-paid employees and therefore would have limited reprieve from 409B. EDIT: it says “become exercisable”, which is completely separate from actual exercise

hkmurakami 9y ago
I would suppose that it matters on the margins when the exercise cost is nontrivial for the early to mid career employee with low liquid assets. (Say mid 5 figures) There won't be a tax bill but they may be pressed to come up with the exercise funds
dmitrygr 9y ago
Not everyone has $x00,000 to exercise options, turning them into illiquid shares in a company which may or may not ever exit. Basically, this: https://qz.com/455109/entrepreneurs-dont-have-a-special-gene-for-risk-they-come-from-families-with-money/ https://qz.com/455109/entrepreneurs-dont-have-a-special-gene...
fossuser 9y ago
A lot of larger private companies don't allow early exercise (and even if they did the strike price is often pretty high anyway). The "become exercisable" language is ambiguous to me. If you have ISOs that became exercisable in one year that at the time were less than 100k, but you didn't exercise them and they're now worth more than that they still remain ISOs right? Would you still hit the 100k limit when you tried to exercise them if AMT is repealed or could you exercise all of them and delay the tax burden until you sell them? If that's the case getting rid of AMT would be a big deal for people in private companies to actually be able to exercise their equity without paying a massive amount of taxes for something they can't liquidate easily.
- paulsutter 9y ago
  I would never work for a company that doesn't allow early exercise. Whether or not you plan to do it, you have to wonder about the attitude of those in charge if they don't allow early exercise.
  - jdavis703 9y ago
    Allowing early exercise is a legal and accounting headache. Many small startups have a hard time even getting stock option agreements to employees. When you're new, small, and possibly don't even have an HR person you can't really spend time on frivolous things like early exercise.
    - fossuser 9y ago
      I also thought that early exercise at a certain point could force a company to go public, but it's possible I'm mixing up laws. I think it had to do with how many share holders you could have, but I think that law also changed to not include employees as share holders.
      - jdavis703 9y ago
        The JOBS Act changed this rule [0]: "In order to mandate becoming an SEC reporting company, you now would have to have $10 million in assets and at least 2000 shareholders or 500 shareholders who are not accredited investors. Stock issued pursuant to an employee compensation plan would not be counted for this purpose." 0: https://investmentbank.com/summary-of-jobs-bill-and-update/ https://investmentbank.com/summary-of-jobs-bill-and-update/
    - drfuchs 9y ago
      Not sure where you’re getting the idea that it’s a hassle to offer early exercise. The 4-person company I joined back when offered early-exercise without my even asking, and it was a huge win: I just had to risk a few thousand dollars (since the valuation was low), and it meant I wasn’t forced to later exercise and sell (in order to cover taxes) as they vested, or reached the end of their exercisabilty, or when the company went public, or when it later got bought out by a bigger public company, or even when I left their employment. Instead, I got to decide when to cash in and owe taxes. But you have to be a pretty early employee for this to work well, and not require a big cash outlay up front.

hkmurakami 9y ago

I would suppose that it matters on the margins when the exercise cost is nontrivial for the early to mid career employee with low liquid assets. (Say mid 5 figures) There won't be a tax bill but they may be pressed to come up with the exercise funds

dmitrygr 9y ago

Not everyone has $x00,000 to exercise options, turning them into illiquid shares in a company which may or may not ever exit. Basically, this: https://qz.com/455109/entrepreneurs-dont-have-a-special-gene-for-risk-they-come-from-families-with-money/ https://qz.com/455109/entrepreneurs-dont-have-a-special-gene...

fossuser 9y ago

A lot of larger private companies don't allow early exercise (and even if they did the strike price is often pretty high anyway). The "become exercisable" language is ambiguous to me. If you have ISOs that became exercisable in one year that at the time were less than 100k, but you didn't exercise them and they're now worth more than that they still remain ISOs right? Would you still hit the 100k limit when you tried to exercise them if AMT is repealed or could you exercise all of them and delay the tax burden until you sell them? If that's the case getting rid of AMT would be a big deal for people in private companies to actually be able to exercise their equity without paying a massive amount of taxes for something they can't liquidate easily.

paulsutter 9y ago
I would never work for a company that doesn't allow early exercise. Whether or not you plan to do it, you have to wonder about the attitude of those in charge if they don't allow early exercise.
- jdavis703 9y ago
  Allowing early exercise is a legal and accounting headache. Many small startups have a hard time even getting stock option agreements to employees. When you're new, small, and possibly don't even have an HR person you can't really spend time on frivolous things like early exercise.
  - fossuser 9y ago
    I also thought that early exercise at a certain point could force a company to go public, but it's possible I'm mixing up laws. I think it had to do with how many share holders you could have, but I think that law also changed to not include employees as share holders.
    - jdavis703 9y ago
      The JOBS Act changed this rule [0]: "In order to mandate becoming an SEC reporting company, you now would have to have $10 million in assets and at least 2000 shareholders or 500 shareholders who are not accredited investors. Stock issued pursuant to an employee compensation plan would not be counted for this purpose." 0: https://investmentbank.com/summary-of-jobs-bill-and-update/ https://investmentbank.com/summary-of-jobs-bill-and-update/
  - drfuchs 9y ago
    Not sure where you’re getting the idea that it’s a hassle to offer early exercise. The 4-person company I joined back when offered early-exercise without my even asking, and it was a huge win: I just had to risk a few thousand dollars (since the valuation was low), and it meant I wasn’t forced to later exercise and sell (in order to cover taxes) as they vested, or reached the end of their exercisabilty, or when the company went public, or when it later got bought out by a bigger public company, or even when I left their employment. Instead, I got to decide when to cash in and owe taxes. But you have to be a pretty early employee for this to work well, and not require a big cash outlay up front.