5 ms·

Boy do I hate how ISO options are treated by the IRS for startup employees. It puts an insane amount of risk on the employee in both coming up with the cash to

Boy do I hate how ISO options are treated by the IRS for startup employees. It puts an insane amount of risk on the employee in both coming up with the cash to exercise(bolt offered loans for this part) and then the worst part, being taxed on unrealized gains. The latter to me seems completely against how the rest of the tax code when it comes to stock based assets. And it leaves employees who are not well informed on these tax details in a possible state of financial ruin should you have a stock valuation jump, then exercise; then stock price goes down, hello bankruptcy!. Its the prime reason I would never work for any startup again that offers ISOs.

bpodgursky 4y ago
- If you join as an early employee, your strike price is minimal and this isn't a concern at all - If you want to minimize risk in return for higher taxes (call ~40%), just hold your ISOs and exercise-and-sell as a same-day sale when you're liquid (ie forgo the tax advantages of ISOs). There's absolutely no way for you to get screwed over if you're willing to take the gain as standard income.
- strikelaserclaw 4y ago
  except in cases where you are let go or decide to leave.
  - JumpCrisscross 4y ago
    > except in cases where you are let go or decide to leave The IRS is only involved at the time of exercise [1][2]. Companies are the ones making ISOs expire, versus convert to NSOs, three months following termination of employment. [1] https://thestartuplawblog.com/incentive-stock-options-post-termination-service-exercise-periods/ https://thestartuplawblog.com/incentive-stock-options-post-t... [2] https://www.cooleygo.com/isos-v-nsos-whats-the-difference/ https://www.cooleygo.com/isos-v-nsos-whats-the-difference/
- paisawalla 4y ago
  But if you actually want to have and hold equity in a company you helped build, and want the most favorable tax treatment, you have to 1. accept compensation in ISOs, likely taking a salary hit 2. exercise, and pay AMT in the exercise year on the spread 3. hold until you can sell, but at least for 12+ months so you qualify for LTCG treatment So you get hit with a lower cash comp in (1) which is an opportunity cost. Then you have to pay taxes in (2) maybe well before the stock is ever liquid in any way. Then you still have to wait for liquidity (3). Plus normally the company does not tell you, an ordinary employee, when its beginning fundraising. If it did, you could at least time your exercise so as to minimize spread. Conversely if I want to take a bet on a public company which I have no relationship to, I just buy and hold. Why is it easier to get favorable treatment for a company I have nothing to do with, versus one that I helped build?
  - deleted 4y ago
    [deleted]
- rconti 4y ago
  If you do your purchase and 89b election soon enough sure. But if the value has ramped up too much before you realize you should early exercise, you might (have) trigger(ed) AMT.
- s1artibartfast 4y ago
  Sure, but nobody is complaining about taxes on penny options. They complain about a 100k tax bill for an asset that is not liquid and may never be worth anything.
bpicolo 4y ago
They ought to regulate how long employees have to purchase vested options after departure or termination. If you had a 10 year window regulated, wouldn't be an issue. It would probably make good outcomes less good (companies would probably grant fewer options, or instead grant RSUs) but a much better mean?
mbesto 4y ago
> It puts an insane amount of risk on the employee The market is what dictates this. You don't have to take a startup job. Facebook, Google, etc. minted hundreds of millionaires when they IPO'd. It's hard for me to feel bad for people who take those risks. I'd argue a whole lot of engineers should be much more judicious about joining startups and ask for more options. If engineers knew how to calculate startup risks better they'd probably know there is too much equity is concentrated to too few individuals (mainly founders).
- subsubzero 4y ago
  you pick two out of thousands! Google IPO'd so long ago that the rules regarding ISOs were different back then, strike prices could be arbitrarily lowered to whatever value the company wanted, not the maximum valuation as required by law now. https://www.sec.gov/news/testimony/2006/ts090606cc.htm https://www.sec.gov/news/testimony/2006/ts090606cc.htm
  - scarface74 4y ago
    And this “I’ll get rich!” statistical improbability is why thousand of employees are willing to work for less than their market value in exchange for Monopoly money. My former CTO who did have a lot to do with our former company having a 10x exit after I left (with very little equity that I didn’t exercise) tried to get me to work with him as a tech lead for what would have been a competitive local offer (mid 100s) - I work remotely - and “equity”. But couldn’t come near the base + RSUs at BigTech even with the recent 30% YTD drop. They also have absolutely no idea how VC funding and the public markets for IPOs work during a bear market. At least I can sell my RSUs for real money when they vest.
    - mbesto 4y ago
      > And this “I’ll get rich!” statistical improbability is why thousand of employees are willing to work for less than their market value in exchange for Monopoly money. And this is precisely my point. If less IC's believed this, it would put market pressure on startups to give them more options and better outcomes (including taxes).

bpodgursky 4y ago

- If you join as an early employee, your strike price is minimal and this isn't a concern at all - If you want to minimize risk in return for higher taxes (call ~40%), just hold your ISOs and exercise-and-sell as a same-day sale when you're liquid (ie forgo the tax advantages of ISOs). There's absolutely no way for you to get screwed over if you're willing to take the gain as standard income.

strikelaserclaw 4y ago
except in cases where you are let go or decide to leave.
- JumpCrisscross 4y ago
  > except in cases where you are let go or decide to leave The IRS is only involved at the time of exercise [1][2]. Companies are the ones making ISOs expire, versus convert to NSOs, three months following termination of employment. [1] https://thestartuplawblog.com/incentive-stock-options-post-termination-service-exercise-periods/ https://thestartuplawblog.com/incentive-stock-options-post-t... [2] https://www.cooleygo.com/isos-v-nsos-whats-the-difference/ https://www.cooleygo.com/isos-v-nsos-whats-the-difference/
paisawalla 4y ago
But if you actually want to have and hold equity in a company you helped build, and want the most favorable tax treatment, you have to 1. accept compensation in ISOs, likely taking a salary hit 2. exercise, and pay AMT in the exercise year on the spread 3. hold until you can sell, but at least for 12+ months so you qualify for LTCG treatment So you get hit with a lower cash comp in (1) which is an opportunity cost. Then you have to pay taxes in (2) maybe well before the stock is ever liquid in any way. Then you still have to wait for liquidity (3). Plus normally the company does not tell you, an ordinary employee, when its beginning fundraising. If it did, you could at least time your exercise so as to minimize spread. Conversely if I want to take a bet on a public company which I have no relationship to, I just buy and hold. Why is it easier to get favorable treatment for a company I have nothing to do with, versus one that I helped build?
- deleted 4y ago
  [deleted]
rconti 4y ago
If you do your purchase and 89b election soon enough sure. But if the value has ramped up too much before you realize you should early exercise, you might (have) trigger(ed) AMT.
s1artibartfast 4y ago
Sure, but nobody is complaining about taxes on penny options. They complain about a 100k tax bill for an asset that is not liquid and may never be worth anything.

bpicolo 4y ago

They ought to regulate how long employees have to purchase vested options after departure or termination. If you had a 10 year window regulated, wouldn't be an issue. It would probably make good outcomes less good (companies would probably grant fewer options, or instead grant RSUs) but a much better mean?

mbesto 4y ago

> It puts an insane amount of risk on the employee The market is what dictates this. You don't have to take a startup job. Facebook, Google, etc. minted hundreds of millionaires when they IPO'd. It's hard for me to feel bad for people who take those risks. I'd argue a whole lot of engineers should be much more judicious about joining startups and ask for more options. If engineers knew how to calculate startup risks better they'd probably know there is too much equity is concentrated to too few individuals (mainly founders).

subsubzero 4y ago
you pick two out of thousands! Google IPO'd so long ago that the rules regarding ISOs were different back then, strike prices could be arbitrarily lowered to whatever value the company wanted, not the maximum valuation as required by law now. https://www.sec.gov/news/testimony/2006/ts090606cc.htm https://www.sec.gov/news/testimony/2006/ts090606cc.htm
- scarface74 4y ago
  And this “I’ll get rich!” statistical improbability is why thousand of employees are willing to work for less than their market value in exchange for Monopoly money. My former CTO who did have a lot to do with our former company having a 10x exit after I left (with very little equity that I didn’t exercise) tried to get me to work with him as a tech lead for what would have been a competitive local offer (mid 100s) - I work remotely - and “equity”. But couldn’t come near the base + RSUs at BigTech even with the recent 30% YTD drop. They also have absolutely no idea how VC funding and the public markets for IPOs work during a bear market. At least I can sell my RSUs for real money when they vest.
  - mbesto 4y ago
    > And this “I’ll get rich!” statistical improbability is why thousand of employees are willing to work for less than their market value in exchange for Monopoly money. And this is precisely my point. If less IC's believed this, it would put market pressure on startups to give them more options and better outcomes (including taxes).