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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" lang

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 Would you still hit the 100k limit when you tried to exercise them if AMT is repealed or could you exercise all of them and delay the tax burden until you sell them?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.
  - s73ver_ 9y ago
    Compensating your employees is not a "frivolous thing".
readams 9y ago
Early exercise only works with non-qualified options. They work by granting non-qualified options that you exercise immediately, but then have a claw-back provision that mirrors the vesting schedule of qualified options. Nothing here prevents that arrangement, but it might become less needed since the repeal of AMT removes much of the incentive to early exercise.

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.
- s73ver_ 9y ago
  Compensating your employees is not a "frivolous thing".

readams 9y ago

Early exercise only works with non-qualified options. They work by granting non-qualified options that you exercise immediately, but then have a claw-back provision that mirrors the vesting schedule of qualified options. Nothing here prevents that arrangement, but it might become less needed since the repeal of AMT removes much of the incentive to early exercise.