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Naive question here. Given that there's a long-term cap gains consideration, if the company has a strong likelihood (call it greater than 50% chance) of IPO is

Naive question here. Given that there's a long-term cap gains consideration, if the company has a strong likelihood (call it greater than 50% chance) of IPO isn't it better to exercise ASAP so the shares are kept more than 12 months in time for the IPO+lockup event? What's the real advantage of waiting to exercise, to make sure that the stock will be worth something versus wasting your call option costs? How high are these strike prices that people are holding out? Again, I've some, but limited (but very different) experience here with equity grants and options.

patothon 5y ago
the question is often do you have the means to acquire that pre ipo stock. except if you join very early, it's too expensive to buy your stock with the level of risk associated. as an example, I joined an early stage startup as an exec (potential good deal!), but I would've had to shore 300k to exercise my stocks, pay taxes on it (minimal, that's the huge advantage here), and more than probably see it fail. now let's play the opposite scenario: you join as an engineer late stage, each ISO might be valued at 10 dollars each. how do you exercise. this game is skewed towards founders. in my example, I had to quit for personal reasons and the company was later acquired. however I wan't able to afford, so I got got of $100ks at the time of acquisition. removing these 90 days time would have let me gain what I was owed. no hard feelings, because I knew the game, but it was the moment I decided no more startups that have this 90 days BS.
avalys 5y ago
Let's say you accept a lower salary from a startup, because they offer you 100,000 options with a standard 4-year vest/1-year cliff/90 days to exercise at a strike price (409a valuation) of $1 / share, and claim that an exit at $10 / share looks likely if growth stays on track. You stay for three years. The exit hasn't come yet because the VCs want to see a higher valuation, but the company has grown and the 409(a) valuation is now $5 / share. You've now vested 60,000 options that would cost you $60,000 to exercise, plus you will have an AMT adjustment of $240,000 because of the difference between the strike price and the current 409(a) valuation. So, exercising those options will cost you $120,000 (ballpark, IANA accountant) in exercise cost and taxes. Keep in mind you've accepted a lower salary for the past three years because of this stock, so you might not have that kind of cash lying around. And even if you do - are you willing to throw $120,000 into a bet that the company will one day have an exit? Keep in mind that the company may have debt, preferred stock, liquidation preferences, etc. and most companies won't share all their past financing terms with ordinary employees, so it may be hard to estimate what a realistic exit even looks like for your stock. And if you're leaving, maybe you're a little disillusioned with how things are going in the first place? You have 90 days to make this decision after leaving the company and then you lose the stock forever. For many people, the answer at this point is that they don't want to take the bet - and they get screwed out of a large part of what was supposed to be their compensation. It's a shitty and exploitative system. I worked at a startup where this exact thing happened to many people who contributed immense value to the company. We had a bumpy year, some management turmoil, etc. and many people left before the IPO and got nothing out of their years of hard work other than a shitty, uncompetitive salary. I will never work for another startup under these terms.
- mancerayder 5y ago
  Makes sense, and thank you for writing this out! It's useful to think about when someone offers equity instead of a higher salary.
dehrmann 5y ago
If the lockup is 180 days, you can wait for a pretty long time before exercising. It's usually halfway apparent when a startup beings IPO readiness. What gets you with waiting, if you have ISOs, is how much AMT hits you. If you're at a >50% IPO company, it's somewhat common to exercise as many options as you can before the AMT hits you. It's also worth remembering that your 50% startup could be Wework. It's worth $9B, but was valued at almost $47B.

patothon 5y ago

the question is often do you have the means to acquire that pre ipo stock. except if you join very early, it's too expensive to buy your stock with the level of risk associated. as an example, I joined an early stage startup as an exec (potential good deal!), but I would've had to shore 300k to exercise my stocks, pay taxes on it (minimal, that's the huge advantage here), and more than probably see it fail. now let's play the opposite scenario: you join as an engineer late stage, each ISO might be valued at 10 dollars each. how do you exercise. this game is skewed towards founders. in my example, I had to quit for personal reasons and the company was later acquired. however I wan't able to afford, so I got got of $100ks at the time of acquisition. removing these 90 days time would have let me gain what I was owed. no hard feelings, because I knew the game, but it was the moment I decided no more startups that have this 90 days BS.

avalys 5y ago

Let's say you accept a lower salary from a startup, because they offer you 100,000 options with a standard 4-year vest/1-year cliff/90 days to exercise at a strike price (409a valuation) of $1 / share, and claim that an exit at $10 / share looks likely if growth stays on track. You stay for three years. The exit hasn't come yet because the VCs want to see a higher valuation, but the company has grown and the 409(a) valuation is now $5 / share. You've now vested 60,000 options that would cost you $60,000 to exercise, plus you will have an AMT adjustment of $240,000 because of the difference between the strike price and the current 409(a) valuation. So, exercising those options will cost you $120,000 (ballpark, IANA accountant) in exercise cost and taxes. Keep in mind you've accepted a lower salary for the past three years because of this stock, so you might not have that kind of cash lying around. And even if you do - are you willing to throw $120,000 into a bet that the company will one day have an exit? Keep in mind that the company may have debt, preferred stock, liquidation preferences, etc. and most companies won't share all their past financing terms with ordinary employees, so it may be hard to estimate what a realistic exit even looks like for your stock. And if you're leaving, maybe you're a little disillusioned with how things are going in the first place? You have 90 days to make this decision after leaving the company and then you lose the stock forever. For many people, the answer at this point is that they don't want to take the bet - and they get screwed out of a large part of what was supposed to be their compensation. It's a shitty and exploitative system. I worked at a startup where this exact thing happened to many people who contributed immense value to the company. We had a bumpy year, some management turmoil, etc. and many people left before the IPO and got nothing out of their years of hard work other than a shitty, uncompetitive salary. I will never work for another startup under these terms.

mancerayder 5y ago
Makes sense, and thank you for writing this out! It's useful to think about when someone offers equity instead of a higher salary.

dehrmann 5y ago

If the lockup is 180 days, you can wait for a pretty long time before exercising. It's usually halfway apparent when a startup beings IPO readiness. What gets you with waiting, if you have ISOs, is how much AMT hits you. If you're at a >50% IPO company, it's somewhat common to exercise as many options as you can before the AMT hits you. It's also worth remembering that your 50% startup could be Wework. It's worth $9B, but was valued at almost $47B.