4 ms·

That 90-day expiry window is the most archaic bullshit. Can't come up with 200K cash? Too bad, and thanks for all that hard work and long hours you put in.

virgilp 6y ago
Another thing that may be hard to understand for non-US citizens. For me, exercising options costs me just that, the option price + bank fees; I owe no tax. I have to pay full tax when & if I sell the shares. This seems like a much fairer taxation regime - I pay tax when I earn something - just having un-sellable shares didn't suddenly increase my wealth. With this, it actually makes sense to exercise options and stay employed at the startup: you now may not be qualified as a short-term seller when you sell the stock, since you held on to it for a while.
- jagged-chisel 6y ago
  One should exercise at the earliest possible convenience. If I'd exercised on day 1 when I joined a startup, I wouldn't have owed tax because I wasn't getting a discount, but a locked-in price. So when I exercised after the value increased, I then owed tax. I've seen it suggested that one should exercise on day 1. But that doesn't have to mean you pay for them immediately (after all, you don't get to keep them immediately - you have to wait for vesting...), so you work out a payment plan with deductions every paycheck so that you've pay fully for whatever is vested at the time it vests.
  - jasondelta 6y ago
    Or one should never exercise at all until an acquisition or an IPO happens. I've seen too many people exercise stock options trying to minimize tax implications down the road, only to see them eventually leave the company for any number of reasons and they end up get heavily diluted to almost nothing in future rounds. All that money basically down the drain trying to chase long term capital gains vs regular income tax rates when the likelihood that they'll make anything is extremely low. Everyone's risk posture is different, but considering how few startups are actually successful, I would argue it's better to just assume the options are worthless and just deal with the regular income tax situation if you get lucky enough to be around during an IPO or acquisition.
    - jagged-chisel 6y ago
      You're definitely correct. "Convenience" is emphasized. If it's not convenient to exercise, don't; wait until a liquidity event. This makes me curious: what's the total typically required to purchase one's options (not including the potential tax implications)? Does it vary wildly from a couple thousand to tens- or hundreds-of-thousands? Lottery ticket money, or significant fractions of annual income?
kentonv 6y ago
FWIW it's rooted in US tax law. Unexercised Incentive Stock Options (ISOs) are required to expire 90 days after an employee leaves. The way some companies get around it is that, after 90 days, they replace the expired ISOs with nonstatutory stock options which, as their name implies, are not recognized by the tax code. Tax code is complicated but NSOs are ultimately worth maybe 10%-20% less than "equivalent" ISOs. But, at least until recently, there wasn't standard paperwork for doing this, so the only companies that did it were those willing to innovate on their stock plan. I think a lot of founders weren't trying to screw their employees, but their lawyers weren't comfortable going off the beaten path. But I think that excuse is fading now. Enough companies have done it to provide precedent. My circa-2015 startup looked at this and fretted a bit but ultimately sidestepped the problem by giving everyone restricted stock instead of options. That's only really possible at the very early stages when the 409(a) valuation is nearly zero. But for anyone joining a seed-stage startup today, that's what I strongly recommend: Ask for restricted stock, and if the purchase cost is non-zero, ask them to comp you for it as a signing bonus (which is "free" for them since they're buying the stock from themselves). You'll have to pay income tax on the value but that should be pretty small (maybe you can even get the company to "gross it up", but that's real dollars for them). Then you'll never have to worry about exercising stock options or paying AMT. Don't forget to file your 83(b) election within 30 days.
- ipnon 6y ago
  Is there a website that contains all of this information in one place? Could any founder be expected to know about the 409(a) and 83(b) without a lawyer?
  - kentonv 6y ago
    Not sure about the first question, but as to the second: If you are starting a startup, especially for the first time, you absolutely need to get a good startup lawyer. Ours* charged $500/hr and was worth every penny. Saved our asses many times. * https://www.bierlegal.com/ https://www.bierlegal.com/
- chris11 6y ago
  > NSOs are ultimately worth maybe 10%-20% less than "equivalent" ISOs I'm at a company that gives NSOs. Can you explain what you mean when you say that NSOs are worth less than ISOs?

virgilp 6y ago

Another thing that may be hard to understand for non-US citizens. For me, exercising options costs me just that, the option price + bank fees; I owe no tax. I have to pay full tax when & if I sell the shares. This seems like a much fairer taxation regime - I pay tax when I earn something - just having un-sellable shares didn't suddenly increase my wealth. With this, it actually makes sense to exercise options and stay employed at the startup: you now may not be qualified as a short-term seller when you sell the stock, since you held on to it for a while.

jagged-chisel 6y ago
One should exercise at the earliest possible convenience. If I'd exercised on day 1 when I joined a startup, I wouldn't have owed tax because I wasn't getting a discount, but a locked-in price. So when I exercised after the value increased, I then owed tax. I've seen it suggested that one should exercise on day 1. But that doesn't have to mean you pay for them immediately (after all, you don't get to keep them immediately - you have to wait for vesting...), so you work out a payment plan with deductions every paycheck so that you've pay fully for whatever is vested at the time it vests.
- jasondelta 6y ago
  Or one should never exercise at all until an acquisition or an IPO happens. I've seen too many people exercise stock options trying to minimize tax implications down the road, only to see them eventually leave the company for any number of reasons and they end up get heavily diluted to almost nothing in future rounds. All that money basically down the drain trying to chase long term capital gains vs regular income tax rates when the likelihood that they'll make anything is extremely low. Everyone's risk posture is different, but considering how few startups are actually successful, I would argue it's better to just assume the options are worthless and just deal with the regular income tax situation if you get lucky enough to be around during an IPO or acquisition.
  - jagged-chisel 6y ago
    You're definitely correct. "Convenience" is emphasized. If it's not convenient to exercise, don't; wait until a liquidity event. This makes me curious: what's the total typically required to purchase one's options (not including the potential tax implications)? Does it vary wildly from a couple thousand to tens- or hundreds-of-thousands? Lottery ticket money, or significant fractions of annual income?

kentonv 6y ago

FWIW it's rooted in US tax law. Unexercised Incentive Stock Options (ISOs) are required to expire 90 days after an employee leaves. The way some companies get around it is that, after 90 days, they replace the expired ISOs with nonstatutory stock options which, as their name implies, are not recognized by the tax code. Tax code is complicated but NSOs are ultimately worth maybe 10%-20% less than "equivalent" ISOs. But, at least until recently, there wasn't standard paperwork for doing this, so the only companies that did it were those willing to innovate on their stock plan. I think a lot of founders weren't trying to screw their employees, but their lawyers weren't comfortable going off the beaten path. But I think that excuse is fading now. Enough companies have done it to provide precedent. My circa-2015 startup looked at this and fretted a bit but ultimately sidestepped the problem by giving everyone restricted stock instead of options. That's only really possible at the very early stages when the 409(a) valuation is nearly zero. But for anyone joining a seed-stage startup today, that's what I strongly recommend: Ask for restricted stock, and if the purchase cost is non-zero, ask them to comp you for it as a signing bonus (which is "free" for them since they're buying the stock from themselves). You'll have to pay income tax on the value but that should be pretty small (maybe you can even get the company to "gross it up", but that's real dollars for them). Then you'll never have to worry about exercising stock options or paying AMT. Don't forget to file your 83(b) election within 30 days.

ipnon 6y ago
Is there a website that contains all of this information in one place? Could any founder be expected to know about the 409(a) and 83(b) without a lawyer?
- kentonv 6y ago
  Not sure about the first question, but as to the second: If you are starting a startup, especially for the first time, you absolutely need to get a good startup lawyer. Ours* charged $500/hr and was worth every penny. Saved our asses many times. * https://www.bierlegal.com/ https://www.bierlegal.com/
chris11 6y ago
> NSOs are ultimately worth maybe 10%-20% less than "equivalent" ISOs I'm at a company that gives NSOs. Can you explain what you mean when you say that NSOs are worth less than ISOs?