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I'm facing a headache with some options I was granted for a startup back in 2013 for being an advisor. I didn't exercise the options at the time (hindsight is 2

I'm facing a headache with some options I was granted for a startup back in 2013 for being an advisor. I didn't exercise the options at the time (hindsight is 20-20). The startup is doing well - it recently raised ~$300m at a ~$3b valuation, but my options expire in Dec 2023 and I'm growing increasingly concerned that they won't have a liquidity event before then. If I exercise my options before then it will be taxed as income which could leave me owing >$100k in taxes to the IRS - but if the company hasn't yet had a liquidity event then I can't sell the options to pay that. Seems like a ridiculous situation for early employees/advisors to be placed in.

boatsie 6y ago
This is a common enough situation that there are companies that will loan you the money to help pay for options and deal with tax liability, using the shares as collateral. I haven’t used one myself and am not a lawyer or financial advisor. One for instance: https://www.esofund.com/blog/exercise-loan https://www.esofund.com/blog/exercise-loan
solumos 6y ago
You should check out SecFi - they helped me out of a similar snag (non-recourse loan).
- sanity31415 6y ago
  Thanks, I'll check them out.
psanford 6y ago
One strategy is to exercise as many options as you can until you would hit AMT (or an amount above AMT you are ok paying). You can do this each year until your expiration date comes up.
- s17n 6y ago
  Not sure this would apply here - I don't think that advisors get ISOs (but I could be wrong).
  - stanleydrew 6y ago
    Advisors get NSOs. You owe income tax on the spread between strike and FMV at time of exercise, regardless of liquidity in the underlying shares.
cushychicken 6y ago
Are you still susceptible to this if they are ISOs? My understanding is that ISOs are only ever taxed at the time of sale. Sounds like you're dealing in an ISO quantity beyond the limits my mind can comprehend though.
- sanity31415 6y ago
  Hmm, I'm not sure - how would I tell if they're classified as ISOs?
  - jonathankoren 6y ago
    It would be in your grant letter explaining the number of options and the strike price.
- jonathankoren 6y ago
  He’s being hit by the AMT due to the value of the options. If you’re hit by the AMT, you’ll owe taxes on the spread between the strike and FMV on exercise, even though you haven’t sold them.
  - deleted 6y ago
    [deleted]
- redfern314 6y ago
  Not quite true - ISOs can incur AMT at time of exercise, which is kind of complicated and doesn't always create a tax burden. In the $100k range, it probably will, but they'd have to do the calculation to find out. https://www.esofund.com/blog/amt-tax https://www.esofund.com/blog/amt-tax Regardless, they'll still have to front the $ to exercise and be left with illiquid stock. It's not a good situation.
- s17n 6y ago
  As others have said, AMT doesn't respect ISOs, which makes ISOs pretty useless.
oillio 6y ago
Have you verified the valuation of the common stock the company is reporting to the IRS? The common stock (what you probably get for your options) is usually valued at significantly less than the valuation from the latest raise.
- sanity31415 6y ago
  Interesting, I have not but will investigate.
  - forkerenok 6y ago
    The keyword you are looking for is 409A. When paying taxes on your equity compensation, the amount you owe is based on the 409A.
    - deleted 6y ago
      [deleted]
    - stanleydrew 6y ago
      My pedantry itch is kicking in and requires me to inform you all that the actual keyword you are looking for is FMV (fair market value) of common stock. Investors set the price for preferred stock in various "rounds," so a company kinda knows what its preferred shares are worth. But common stock usually isn't traded in any kind of market (until liquidity), so there's no obvious way to know what its FMV is. A 409a valuation is a "professional" assessment of the value (price) of a share of common stock, which a company's board can safely use to determine the FMV of its common stock. Anyway GGP is right that the amount subject to tax at exercise will be the difference between your option strike price (which was set based on FMV on the date your grant was issued) and the FMV of common stock on the date of exercise. The FMV of common stock is almost always less than the price of preferred stock, though the two prices do converge as a company grows and gets closer to liquidity.
  - rmk 6y ago
    If you were granted Incentive Stock Options (ISOs), you are in for a world of hurt. You may end up wishing you'd never spent so much money on them. With the recent Trump Tax Reform, AMT thresholds have risen but it's best to check with a CPA (or what's called an EA - Enrolled Agent) about the tax implications of exercising your options. You may view the upside in an entirely different light. The nastiness of AMT is another huge reason the startup stock option game has become worthless/-ve worth to most people who have been in this industry long enough to know better. With Trump's Tax Reforms, this has somewhat lessened, but it's still a huge problem.
forkerenok 6y ago
You can get non-recourse financing to cover exercise costs and taxes. I.e. you can offload the risk of early exercise for a share of the potential upside. Source: I work at Secfi (https://secfi.com https://secfi.com) and our equity and tax advisors are amazing.
- lemonspat 6y ago
  Could you explain more on what this means?
  - forkerenok 6y ago
    Gladly! Non-recourse financing in this context means that in the event that shares (which are held as collateral) became worthless there is no personal recourse. I.e. your savings, house and whatnot are not on the hook. The contract is just dissolved. In this scenario you spend $0 of your own money on exercise. The "catch" is that you'll have to share the upside in case of a better outcome (according to pre-agreed rates). But the reality is that it's still a better option than just waiting for IPO/acquisition to exercise and sell shares at the same time (so called cashless exercise) [1]. [1] My colleague, Vieje, twitted a great case study on this topic: https://twitter.com/viejep/status/1306364614720909312 https://twitter.com/viejep/status/1306364614720909312
burnte 6y ago
Can't sell them back to the company or to another investor in the company?
dehrmann 6y ago
> hindsight is 20-20 Might be best to stop using this idiom.
- acjohnson55 6y ago
  Why?
lr4444lr 6y ago
If you have a Roth retirement account (e.g. IRA, 401k), I believe you can exercise what you can cover from those funds and not have to worry about the gains there.

boatsie 6y ago

This is a common enough situation that there are companies that will loan you the money to help pay for options and deal with tax liability, using the shares as collateral. I haven’t used one myself and am not a lawyer or financial advisor. One for instance: https://www.esofund.com/blog/exercise-loan https://www.esofund.com/blog/exercise-loan

solumos 6y ago

You should check out SecFi - they helped me out of a similar snag (non-recourse loan).

sanity31415 6y ago
Thanks, I'll check them out.

psanford 6y ago

One strategy is to exercise as many options as you can until you would hit AMT (or an amount above AMT you are ok paying). You can do this each year until your expiration date comes up.

s17n 6y ago
Not sure this would apply here - I don't think that advisors get ISOs (but I could be wrong).
- stanleydrew 6y ago
  Advisors get NSOs. You owe income tax on the spread between strike and FMV at time of exercise, regardless of liquidity in the underlying shares.

cushychicken 6y ago

Are you still susceptible to this if they are ISOs? My understanding is that ISOs are only ever taxed at the time of sale. Sounds like you're dealing in an ISO quantity beyond the limits my mind can comprehend though.

sanity31415 6y ago
Hmm, I'm not sure - how would I tell if they're classified as ISOs?
- jonathankoren 6y ago
  It would be in your grant letter explaining the number of options and the strike price.
jonathankoren 6y ago
He’s being hit by the AMT due to the value of the options. If you’re hit by the AMT, you’ll owe taxes on the spread between the strike and FMV on exercise, even though you haven’t sold them.
- deleted 6y ago
  [deleted]
redfern314 6y ago
Not quite true - ISOs can incur AMT at time of exercise, which is kind of complicated and doesn't always create a tax burden. In the $100k range, it probably will, but they'd have to do the calculation to find out. https://www.esofund.com/blog/amt-tax https://www.esofund.com/blog/amt-tax Regardless, they'll still have to front the $ to exercise and be left with illiquid stock. It's not a good situation.
s17n 6y ago
As others have said, AMT doesn't respect ISOs, which makes ISOs pretty useless.

oillio 6y ago

Have you verified the valuation of the common stock the company is reporting to the IRS? The common stock (what you probably get for your options) is usually valued at significantly less than the valuation from the latest raise.

sanity31415 6y ago
Interesting, I have not but will investigate.
- forkerenok 6y ago
  The keyword you are looking for is 409A. When paying taxes on your equity compensation, the amount you owe is based on the 409A.
  - deleted 6y ago
    [deleted]
  - stanleydrew 6y ago
    My pedantry itch is kicking in and requires me to inform you all that the actual keyword you are looking for is FMV (fair market value) of common stock. Investors set the price for preferred stock in various "rounds," so a company kinda knows what its preferred shares are worth. But common stock usually isn't traded in any kind of market (until liquidity), so there's no obvious way to know what its FMV is. A 409a valuation is a "professional" assessment of the value (price) of a share of common stock, which a company's board can safely use to determine the FMV of its common stock. Anyway GGP is right that the amount subject to tax at exercise will be the difference between your option strike price (which was set based on FMV on the date your grant was issued) and the FMV of common stock on the date of exercise. The FMV of common stock is almost always less than the price of preferred stock, though the two prices do converge as a company grows and gets closer to liquidity.
- rmk 6y ago
  If you were granted Incentive Stock Options (ISOs), you are in for a world of hurt. You may end up wishing you'd never spent so much money on them. With the recent Trump Tax Reform, AMT thresholds have risen but it's best to check with a CPA (or what's called an EA - Enrolled Agent) about the tax implications of exercising your options. You may view the upside in an entirely different light. The nastiness of AMT is another huge reason the startup stock option game has become worthless/-ve worth to most people who have been in this industry long enough to know better. With Trump's Tax Reforms, this has somewhat lessened, but it's still a huge problem.

forkerenok 6y ago

You can get non-recourse financing to cover exercise costs and taxes. I.e. you can offload the risk of early exercise for a share of the potential upside. Source: I work at Secfi (https://secfi.com https://secfi.com) and our equity and tax advisors are amazing.

lemonspat 6y ago
Could you explain more on what this means?
- forkerenok 6y ago
  Gladly! Non-recourse financing in this context means that in the event that shares (which are held as collateral) became worthless there is no personal recourse. I.e. your savings, house and whatnot are not on the hook. The contract is just dissolved. In this scenario you spend $0 of your own money on exercise. The "catch" is that you'll have to share the upside in case of a better outcome (according to pre-agreed rates). But the reality is that it's still a better option than just waiting for IPO/acquisition to exercise and sell shares at the same time (so called cashless exercise) [1]. [1] My colleague, Vieje, twitted a great case study on this topic: https://twitter.com/viejep/status/1306364614720909312 https://twitter.com/viejep/status/1306364614720909312

burnte 6y ago

Can't sell them back to the company or to another investor in the company?

dehrmann 6y ago

> hindsight is 20-20 Might be best to stop using this idiom.

acjohnson55 6y ago
Why?

lr4444lr 6y ago

If you have a Roth retirement account (e.g. IRA, 401k), I believe you can exercise what you can cover from those funds and not have to worry about the gains there.