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The tax games are dumb no matter if you have ISOs or Non-quals or whatever options. The standard should be 83(b) elections supported with the company covering

The tax games are dumb no matter if you have ISOs or Non-quals or whatever options. The standard should be 83(b) elections supported with the company covering cash to exercise (or at least some portion). That makes the equity closer to RSUs, which is more aligned with the desired incentive. VCs / investors should be putting more money into companies to make this work; the employee pool is only typically 10% so it’s a tiny haircut to them.

lifeisstillgood 5y ago
I am trying to grok this bit. If I understand it, an 83(b) election allows me to buy stock in the company at the (say) day of employment, and recognise that as income on the same day (ie I buy the stock as I join). Then there is some restriction on me selling it during my employment (not quite vesting but similar). Which sounds sensible - but I may have misunderstood. Overall it seems either people are trying to make a simple situation seem complex, or the (US?) tax code is set up badly. http://www.startupcompanylawyer.com/2008/02/15/what-is-an-83b-election/ http://www.startupcompanylawyer.com/2008/02/15/what-is-an-83...
- nemo44x 5y ago
  You are exercising options that haven’t vested yet. But because strike and FMV are the same you have no tax liability. So when they beat they become stock and long term capital gains if they become liquid one day. Here’s the best part - if the company is worth < 50m at the time then you are granted and exercise them, when you sell those stocks one day, you will owe 0 income tax as it’s a “qualified small business stock” - on your first 10m of profit. Wowza’s!
  - enahs-sf 5y ago
    QSBS ftw
    - nemo44x 5y ago
      Indeed and I should clarify - it’s not if the company is “worth < 50m” it’s if the company has less than 50m in assets generally. So you could have raised 30m at a 200m valuation and qualify. It’s amazing.
- acjohnson55 5y ago
  I wrote a lot about the ins and outs of ISOs here: https://acjay.com/2021/10/31/employee-equity-understanding-qualifying-disposition-is-a-must/ https://acjay.com/2021/10/31/employee-equity-understanding-q...
nemo44x 5y ago
That’s essentially a signing bonus. Remember that you will owe income tax on that. So if they paid the option price and 83b’d you then you would be on the hook for taxes (the money they used to exercise) on an asset that could be worth 0 one day. The company could however pay for exercising and pay the income tax on that cost. Then it would be interesting.
berberous 5y ago
If the VCs put in more cash for this, it’s just going to dilute the existing stockholders (including the employees). The cash is not immaterial. And as another response said, the cash to cover the exercise is taxable income so this idea is really not tax efficient.
yibg 5y ago
That only works at the early stages. Later on the cost to exercise could be massive.

lifeisstillgood 5y ago

I am trying to grok this bit. If I understand it, an 83(b) election allows me to buy stock in the company at the (say) day of employment, and recognise that as income on the same day (ie I buy the stock as I join). Then there is some restriction on me selling it during my employment (not quite vesting but similar). Which sounds sensible - but I may have misunderstood. Overall it seems either people are trying to make a simple situation seem complex, or the (US?) tax code is set up badly. http://www.startupcompanylawyer.com/2008/02/15/what-is-an-83b-election/ http://www.startupcompanylawyer.com/2008/02/15/what-is-an-83...

nemo44x 5y ago
You are exercising options that haven’t vested yet. But because strike and FMV are the same you have no tax liability. So when they beat they become stock and long term capital gains if they become liquid one day. Here’s the best part - if the company is worth < 50m at the time then you are granted and exercise them, when you sell those stocks one day, you will owe 0 income tax as it’s a “qualified small business stock” - on your first 10m of profit. Wowza’s!
- enahs-sf 5y ago
  QSBS ftw
  - nemo44x 5y ago
    Indeed and I should clarify - it’s not if the company is “worth < 50m” it’s if the company has less than 50m in assets generally. So you could have raised 30m at a 200m valuation and qualify. It’s amazing.
acjohnson55 5y ago
I wrote a lot about the ins and outs of ISOs here: https://acjay.com/2021/10/31/employee-equity-understanding-qualifying-disposition-is-a-must/ https://acjay.com/2021/10/31/employee-equity-understanding-q...

nemo44x 5y ago

That’s essentially a signing bonus. Remember that you will owe income tax on that. So if they paid the option price and 83b’d you then you would be on the hook for taxes (the money they used to exercise) on an asset that could be worth 0 one day. The company could however pay for exercising and pay the income tax on that cost. Then it would be interesting.

berberous 5y ago

If the VCs put in more cash for this, it’s just going to dilute the existing stockholders (including the employees). The cash is not immaterial. And as another response said, the cash to cover the exercise is taxable income so this idea is really not tax efficient.

yibg 5y ago

That only works at the early stages. Later on the cost to exercise could be massive.