4 ms·

> Can’t you guys just replace this 90-day clause with a 10-year expiry, so that I wouldn’t have to deal with all these risks? I'm not an expert but my understa

> Can’t you guys just replace this 90-day clause with a 10-year expiry, so that I wouldn’t have to deal with all these risks? I'm not an expert but my understanding is that everyone should be pushing for this or for options to be way cheaper to purchase when you leave. Without one of those two options the safest thing to do to not waste vesting time is join a public company or a late stage startup. Late stage startup you're more likely to be acquired or IPO while you're there and you don't purchase options out of pocket. Early stage startups are where you're least likely to stay the 7-12 years required for the exit event to take place and thus most likely to leave vested options on the table when you leave the company because you don't have cash and/or don't want to risk that cash.

HWR_14 5y ago
As I understand it, options being cheaper to purchase means a larger tax bill when you vest them, since they have a strike price below their current value.
- lbotos 5y ago
  I'm not sure what you mean. You aren't taxed when options vest because there was no gain. Only when you exercise options, and you will be taxed on the gain. So if you make more money, sure your tax will be higher. RSUs are taxed at vest as that's a gain.
  - HWR_14 5y ago
    Because the options, when they vest, have no value. However, an ITM option does have value. The amount it's ITM. So you'd have to pay the amount it's below FMV as income, right?
    - lbotos 5y ago
      An options contract is the right to purchase shares at a certain price. Your vesting gives you the right to purchase more shares. If you do not purchase those shares, there was no gain, so there was no tax.
      - tylerhou 5y ago
        I think the parent poster is saying that this tax treatment of options is inconsistent with the way RSUs are taxed, though. RSUs are taxed at vest time even if you hold the shares, presumably because they can be sold immediately since they have some FMV. Options are not taxed at vest time, even if they are ITM and have some large positive FMV. And for ISOs, even if you exercise immediately at vest and you don't sell the exercised shares, there is no tax (assuming no AMT). What is the reason for the different tax treatment?
      - HWR_14 5y ago
        An option itself has fair market value. Like, I can buy options on Uber stock right now at a variety of price points. You can make the case that options at FMV have negligible value, which is why they get special treatment. But if you want to work at a startup unicorn and ask for stock options with a strike price of $0.01 as your whole income, it's still (possibly) extremely valuable.
        lbotos 5y ago
        This is going to sound mean but the more you talk the more confused I am about your original point. Please understand, I am trying to understand you. You originally said: > options being cheaper to purchase means a larger tax bill when you vest them The operative word here is vest. No tax on vest. I think you are trying to say "if you join a startup and get dirt cheap options, when you exercise them at a later date and they are worth something then, your tax bill will be larger than if you got more expensive options and exercise them. Yes, this is true. - strike price: $0.01 FMV at exercise: $20 - strike price: $15.00 FMV at exercise: $20 You have a larger gain in the first, so sure, you will pay more tax. Is this what you are trying to say?
        HWR_14 5y ago
        If you give me something of value (stock, steaks, money) in return for work I owe taxes on it. As I understand it, I owe taxes when such an item (eg RSUs) become something I can acquire and control, aka vest. I can go online right now and buy options in Uber (or any other publicly traded company). Options clearly have some value. Options in a private company with a strike price of FMV have essentially no value, and have no taxes. Options in a private company with a strike price of $0.01 and a FMV (per share) of $20.00 are worth at least $19.99. Therefore, options with a very low strike price should create a taxable event when they vest, whereas options with a FMV strike price would create a taxable event of $0 when they vest. So a very low strike price seems to force employees to pay taxes when they vest. It's possible I'm wrong (I'm not a tax accountant or attorney), but I would like the problem in my logic pointed out.
bspear 5y ago
Believe the downside to 10-year is that they convert from ISOs to NSOs, which is far less tax-favorable But obviously, much better cashflow-wise
anamax 5y ago
If it's early, you should 83(b) the options. That eliminates the "tax at exercise" problem and starts the long-term holding clock. Yes, you have to come up with the cash to buy the stock at 83(b) time, but if it's early, that's pocket change.
- bcassedy 5y ago
  It's not pocket change for people early in their career. An early engineer in a series A company could easily be getting 10k+ in options
  - anamax 5y ago
    Series A isn't "early" these days and 10k options reflects that. (100k is only 1% given 10M authorized, 10M being reasonably common for initial authorization and 1% being around market for an early engineer.) That said, the strike price for common should still be reasonable at Series A - not $0.0001, but not $10 either, so 5-10k options can be around $10k. (Yes, a company can raise at $100M valuation even though the 10M common have a strike price of $1. The $100M is preferred.) And, there's no law saying that 803(b) is all or nothing.

HWR_14 5y ago

As I understand it, options being cheaper to purchase means a larger tax bill when you vest them, since they have a strike price below their current value.

lbotos 5y ago
I'm not sure what you mean. You aren't taxed when options vest because there was no gain. Only when you exercise options, and you will be taxed on the gain. So if you make more money, sure your tax will be higher. RSUs are taxed at vest as that's a gain.
- HWR_14 5y ago
  Because the options, when they vest, have no value. However, an ITM option does have value. The amount it's ITM. So you'd have to pay the amount it's below FMV as income, right?
  - lbotos 5y ago
    An options contract is the right to purchase shares at a certain price. Your vesting gives you the right to purchase more shares. If you do not purchase those shares, there was no gain, so there was no tax.
    - tylerhou 5y ago
      I think the parent poster is saying that this tax treatment of options is inconsistent with the way RSUs are taxed, though. RSUs are taxed at vest time even if you hold the shares, presumably because they can be sold immediately since they have some FMV. Options are not taxed at vest time, even if they are ITM and have some large positive FMV. And for ISOs, even if you exercise immediately at vest and you don't sell the exercised shares, there is no tax (assuming no AMT). What is the reason for the different tax treatment?
    - HWR_14 5y ago
      An option itself has fair market value. Like, I can buy options on Uber stock right now at a variety of price points. You can make the case that options at FMV have negligible value, which is why they get special treatment. But if you want to work at a startup unicorn and ask for stock options with a strike price of $0.01 as your whole income, it's still (possibly) extremely valuable.
      - lbotos 5y ago
        This is going to sound mean but the more you talk the more confused I am about your original point. Please understand, I am trying to understand you. You originally said: > options being cheaper to purchase means a larger tax bill when you vest them The operative word here is vest. No tax on vest. I think you are trying to say "if you join a startup and get dirt cheap options, when you exercise them at a later date and they are worth something then, your tax bill will be larger than if you got more expensive options and exercise them. Yes, this is true. - strike price: $0.01 FMV at exercise: $20 - strike price: $15.00 FMV at exercise: $20 You have a larger gain in the first, so sure, you will pay more tax. Is this what you are trying to say?
        HWR_14 5y ago
        If you give me something of value (stock, steaks, money) in return for work I owe taxes on it. As I understand it, I owe taxes when such an item (eg RSUs) become something I can acquire and control, aka vest. I can go online right now and buy options in Uber (or any other publicly traded company). Options clearly have some value. Options in a private company with a strike price of FMV have essentially no value, and have no taxes. Options in a private company with a strike price of $0.01 and a FMV (per share) of $20.00 are worth at least $19.99. Therefore, options with a very low strike price should create a taxable event when they vest, whereas options with a FMV strike price would create a taxable event of $0 when they vest. So a very low strike price seems to force employees to pay taxes when they vest. It's possible I'm wrong (I'm not a tax accountant or attorney), but I would like the problem in my logic pointed out.

bspear 5y ago

Believe the downside to 10-year is that they convert from ISOs to NSOs, which is far less tax-favorable But obviously, much better cashflow-wise

anamax 5y ago

If it's early, you should 83(b) the options. That eliminates the "tax at exercise" problem and starts the long-term holding clock. Yes, you have to come up with the cash to buy the stock at 83(b) time, but if it's early, that's pocket change.

bcassedy 5y ago
It's not pocket change for people early in their career. An early engineer in a series A company could easily be getting 10k+ in options
- anamax 5y ago
  Series A isn't "early" these days and 10k options reflects that. (100k is only 1% given 10M authorized, 10M being reasonably common for initial authorization and 1% being around market for an early engineer.) That said, the strike price for common should still be reasonable at Series A - not $0.0001, but not $10 either, so 5-10k options can be around $10k. (Yes, a company can raise at $100M valuation even though the 10M common have a strike price of $1. The $100M is preferred.) And, there's no law saying that 803(b) is all or nothing.