4 ms·

Exactly this. As far as I'm concerned the purpose of ISOs at companies more than a year old is to trick junior engineers into accepting a lower salary than they

by ng12 7y ago

Exactly this. As far as I'm concerned the purpose of ISOs at companies more than a year old is to trick junior engineers into accepting a lower salary than they would receive elsewhere. Unless you have at least half a percent of a company you really, truly believe in I'd just ignore this article and put the value somewhere between $0 and a roll of lottery tickets.

UncleMeat 7y ago
Worse, as OP states, they can cause you to lose money. They can be worth less than zero dollars. Pay piles of taxes on the exercised options and then watch the company get gutted and preferred investors take everything.
- pjbk 7y ago
  Sadly, examples from the dotcom burst and housing crisis abound. It's a double edged sword. I have always preferred to go for early exercising. "Many of these workers now owe far more in taxes than their stock is worth. Former Cisco engineer Jeffrey Chou, 32, owes $2.5 million in taxes on company stock he purchased last year that has since withered in value. Chou figures that if he were to sell everything he owns, including the three-bedroom Foster City, Calif., townhouse that he shares with his wife and 8-month-old daughter, the family still could not pay the bill." * https://www.chicagotribune.com/sns-tech-taxes-story.html https://www.chicagotribune.com/sns-tech-taxes-story.html
  - rhizome 7y ago
    That sounds like a single-edged sword to me.
  - ska 7y ago
    Hell, plenty examples exists from when the general economy was just fine. Startups are startups.
  - refurb 7y ago
    Jeeze. The IRS must work with you on that, right? Talk about getting screwed!
  - chii 7y ago
    > $2.5 million in taxes on company stock he purchased last year that has since withered in value. but if the stock dropped in value, doesn't the loss in capital offset the taxes? Or has he _already_ paid the taxes, and cannot claw back any losses (since he has to offset those losses on future capital gains from other sources)?
    - bm1362 7y ago
      The stock is counted as income when it is exercised. The basis is the strike price then, once you sell later it’s considered either capital gain or loss. My understanding is that you can only apply 3000 in capital loses to income tax liability.
      - sokoloff 7y ago
        You can apply unlimited capital loss against capital gains and then an additional $3K of capital loss against income each year.
      - MAGZine 7y ago
        That is an NSO, not ISO.
    - dpiers 7y ago
      That's not how ISOs work. You are taxed on the bargain element (discount to fair value provided by the option) at exercise under AMT, and taxed when you sell under the normal tax rules. Let's say you worked at Uber and you exercised ISOs at the IPO that had appreciated such that the bargain element at exercise was $1,000,000. You would owe 28% Federal + 7% California = $350,000 under AMT (ignoring a lot of other things for simplicity) in April 2020. When you sell your shares, you will be able to reclaim some of this tax through credits for AMT paid in previous years. By the time the employee lockup expired in November 2019, the shares are trading 43% lower than the price you exercised at and are only worth ~$577K. You still have a $350K tax bill under AMT due in April 2020. Because you exercised in 2019, you have an out - by selling the shares in a the same calendar year, you can lower the basis under AMT, but you give up the ability to pay long term capital gains rates on the sale (0-25% fed + 0-13.3% CA) and instead pay ordinary income tax rates (22-43% fed + 0-13.3% CA). Let's just say it would be 40% - you could reduce your tax bill to $231K by selling all of your shares. You have until the employee trading window closes in mid-December to decide whether to hold onto your shares for the eventual preferential tax treatment, hoping they recover before the tax bill ruins you, or to double your tax rate to save money on taxes this year. Now, the benefit of hindsight: If you had sold all of your shares, you would have missed out on $330K in gains in the following 60 days. If you held all of your shares, you are still facing a hefty AMT bill and years of careful tax planning to reclaim the AMT credits you generated. Oh, and even if the shares 10x in value, you are still going to have >$100K in AMT credits that will probably take 10+ years to recover.
jaz46 7y ago
I'm not saying you're wrong at all -- most typical startup ISO offerings suck and are not good situations for employees. That said, as a founder who custom designed our stock plan to be as employee-friendly as we could, there is a better way when actually done right and not just "following the standards". Stock plan improvements like super long post-termination exercise, offering RSAs instead of just stock options, and most importantly in my opinion, adequately educating your employees on the risks and return possibilities of their equity! It is irresponsible and manipulative. IMO, for a company to say, "we're giving you X shares worth Y dollars now and it might go up way more than that." While many employees' eyes will glaze over a bit if you start citing tax code, helping them get the basics and fully internalize the risk/reward tradeoff is both doable and necessary! Equity can be a really valuable part of early employee equity and it's just as much of a peeve of mine to hear people say it's worth $0/lottery as to hear companies oversell the startup dream.
- choppaface 7y ago
  > It is irresponsible and manipulative. IMO, for a company to say, "we're giving you X shares worth Y dollars now and it might go up way more than that." That’s why it’s illegal to tell an employee (or any potential investor) that their X shares are worth $Y. You must give a 409a valuation or some other evidence to supplant the valuation, and you must clearly state what percentage the share represents (or disclose total number of shares). Misleading and false financial claims are fraud.

by ng12 7y ago

UncleMeat 7y ago

Worse, as OP states, they can cause you to lose money. They can be worth less than zero dollars. Pay piles of taxes on the exercised options and then watch the company get gutted and preferred investors take everything.

pjbk 7y ago
Sadly, examples from the dotcom burst and housing crisis abound. It's a double edged sword. I have always preferred to go for early exercising. "Many of these workers now owe far more in taxes than their stock is worth. Former Cisco engineer Jeffrey Chou, 32, owes $2.5 million in taxes on company stock he purchased last year that has since withered in value. Chou figures that if he were to sell everything he owns, including the three-bedroom Foster City, Calif., townhouse that he shares with his wife and 8-month-old daughter, the family still could not pay the bill." * https://www.chicagotribune.com/sns-tech-taxes-story.html https://www.chicagotribune.com/sns-tech-taxes-story.html
- rhizome 7y ago
  That sounds like a single-edged sword to me.
- ska 7y ago
  Hell, plenty examples exists from when the general economy was just fine. Startups are startups.
- refurb 7y ago
  Jeeze. The IRS must work with you on that, right? Talk about getting screwed!
- chii 7y ago
  > $2.5 million in taxes on company stock he purchased last year that has since withered in value. but if the stock dropped in value, doesn't the loss in capital offset the taxes? Or has he _already_ paid the taxes, and cannot claw back any losses (since he has to offset those losses on future capital gains from other sources)?
  - bm1362 7y ago
    The stock is counted as income when it is exercised. The basis is the strike price then, once you sell later it’s considered either capital gain or loss. My understanding is that you can only apply 3000 in capital loses to income tax liability.
    - sokoloff 7y ago
      You can apply unlimited capital loss against capital gains and then an additional $3K of capital loss against income each year.
    - MAGZine 7y ago
      That is an NSO, not ISO.
  - dpiers 7y ago
    That's not how ISOs work. You are taxed on the bargain element (discount to fair value provided by the option) at exercise under AMT, and taxed when you sell under the normal tax rules. Let's say you worked at Uber and you exercised ISOs at the IPO that had appreciated such that the bargain element at exercise was $1,000,000. You would owe 28% Federal + 7% California = $350,000 under AMT (ignoring a lot of other things for simplicity) in April 2020. When you sell your shares, you will be able to reclaim some of this tax through credits for AMT paid in previous years. By the time the employee lockup expired in November 2019, the shares are trading 43% lower than the price you exercised at and are only worth ~$577K. You still have a $350K tax bill under AMT due in April 2020. Because you exercised in 2019, you have an out - by selling the shares in a the same calendar year, you can lower the basis under AMT, but you give up the ability to pay long term capital gains rates on the sale (0-25% fed + 0-13.3% CA) and instead pay ordinary income tax rates (22-43% fed + 0-13.3% CA). Let's just say it would be 40% - you could reduce your tax bill to $231K by selling all of your shares. You have until the employee trading window closes in mid-December to decide whether to hold onto your shares for the eventual preferential tax treatment, hoping they recover before the tax bill ruins you, or to double your tax rate to save money on taxes this year. Now, the benefit of hindsight: If you had sold all of your shares, you would have missed out on $330K in gains in the following 60 days. If you held all of your shares, you are still facing a hefty AMT bill and years of careful tax planning to reclaim the AMT credits you generated. Oh, and even if the shares 10x in value, you are still going to have >$100K in AMT credits that will probably take 10+ years to recover.

jaz46 7y ago

I'm not saying you're wrong at all -- most typical startup ISO offerings suck and are not good situations for employees. That said, as a founder who custom designed our stock plan to be as employee-friendly as we could, there is a better way when actually done right and not just "following the standards". Stock plan improvements like super long post-termination exercise, offering RSAs instead of just stock options, and most importantly in my opinion, adequately educating your employees on the risks and return possibilities of their equity! It is irresponsible and manipulative. IMO, for a company to say, "we're giving you X shares worth Y dollars now and it might go up way more than that." While many employees' eyes will glaze over a bit if you start citing tax code, helping them get the basics and fully internalize the risk/reward tradeoff is both doable and necessary! Equity can be a really valuable part of early employee equity and it's just as much of a peeve of mine to hear people say it's worth $0/lottery as to hear companies oversell the startup dream.

choppaface 7y ago
> It is irresponsible and manipulative. IMO, for a company to say, "we're giving you X shares worth Y dollars now and it might go up way more than that." That’s why it’s illegal to tell an employee (or any potential investor) that their X shares are worth $Y. You must give a 409a valuation or some other evidence to supplant the valuation, and you must clearly state what percentage the share represents (or disclose total number of shares). Misleading and false financial claims are fraud.