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Ask HN: Why don’t companies offer a strike price of $0.01 on options?

There are plenty of companies without liquidity where I’d be happy to accept options as compensation… Except with strike prices as high as they are, exercising them becomes painful. My current job would require over $100k to exercise my options. That’s a massive hit to my base pay, effectively cutting my salary by like 15%. In my salary negotiation I basically had to value those options at $0 because of this. Why don’t companies just set the strike price at $0.01? It doesn’t cost them anything does it? That would make options way more appealing, and allow them to decrease base pay and thereby save cash. Is there some practical reason why the strike price has to be so high?

nostrademons 4y ago
There are unfavorable tax implications for both the company and the employee if the strike price is different from the current fair market value of the company's stock.
- erikpukinskis 4y ago
  I believe it… what are those implications?
  - nostrademons 4y ago
    In a nutshell, the difference between the fair market value of options and the strike price is considered income. That means the employee has to pay taxes on it in the tax year of the grant. It's non-cash compensation, which means the employee may not have the cash to pay those taxes, which can leave employees in the bind of owing the U.S. government money that they don't actually have. In the example you give here, where it would cost $100K to exercise your options, you would probably owe $30-40K in taxes if they granted them to you at close to zero cost, and you would still have only illiquid stock options (not even stock, which is what you get when you exercise the options). From the company perspective, they have to book this as a compensation expense, which means that their earnings are lower (perhaps negative), their burn rate is higher, their runway is shorter - and these are all the metrics that investors look at to determine if they're going to give the company more money, which can sink the company.
    - api 4y ago
      The whole system of option pricing and taxation is incredibly perverse. Why not just tax when liquidity is realized and cash is in the bank?
      - nostrademons 4y ago
        I agree with you, but I'll point out that there are a lot of voices today arguing to tax stocks, crypto, and other property the way stock options are today (eg. wealth tax; tax on crypto->crypto exchanges; proposed tax on unrealized capital gains). The idea that your wealth can increase without you being taxed on it seems to be very unpopular with the general population. Come to think of it, I wonder if the reason for taxing stock options the way they are is because otherwise there'd be a strong incentive to pay in stock rather than cash, and then everyone would be paying capital gains taxes instead of income, and then there'd be a strong call to tax capital gains at the same rates as income and the wealthy & powerful would not enjoy that.
        deleted 4y ago
        [deleted]
      - s1artibartfast 4y ago
        Devils advocate: you are getting you something of value. What if your company payed you with 1,000 lotto tickets. Do you pay taxes on that only if you win? Options have a market value so they are compensation
        api 4y ago
        Yeah, only if you win. Otherwise there isn’t any value. Do you pay taxes on a pat on the back?
        s1artibartfast 4y ago
        Options and lotto tickets obviously have value. Options cost money to purchase on an stock exchange.
treeface9000 4y ago
You can always do a "cashless exercise"... assuming your options are actually worth something. Essentially it auto sells enough shares to cover the cost to exercise and leaves you with the rest.
- s1artibartfast 4y ago
  This is situation depends on if the shares are transferable, if there is a market for exchange, and many other factors.
  - treeface9000 4y ago
bombcar 4y ago
Because if the stock is valued at $10, and the strike price is $10 or above, the option is currently worthless. If the stock is valued at $10 and the strike price is $0.01, the option is currently worth $9.99. That's a big difference. Issuing an option with a low strike price would be better handled by issuing shares (which some companies do).
- erikpukinskis 4y ago
  > If the stock is valued at $10 and the strike price is $0.01, the option is currently worth $9.99. Right, but isn’t that a good thing? Then the employee gets some actual compensation, versus having to pay money for something that may have no value at all. > Issuing an option with a low strike price would be better handled by issuing shares Maybe that’s my real question then… why doesn’t every company issue shares? It would seem way more appealing to me.
  - bombcar 4y ago
    Because most of these are issued when they’re completely unsellable. If they give you options and then go belly up you’re out nothing. If they give you $100k of shares (based on whatever last funding round) you now owe tax on that, and may not be able to write it off when it goes to zero until some time passes, and may never recover the tax if you never have enough capital gains to offset.
s1artibartfast 4y ago
>Why don’t companies just set the strike price at $0.01? In your example, it would cost them 100k, or likely more. Every option you exercise costs the company the value of the stock. If it costs you 100k, and is worth 1M, the company is loosing 900k. If the strike price was zero, they would be losing even more.
- erikpukinskis 4y ago
  Why would it cost them anything? They don’t pay anything when someone exercises their options, they just sign over a stock certificate. The shareholders maybe “lose” some value, but that’s the same as any stock offering. It’s a dilution event.
  - s1artibartfast 4y ago
    Yes, the stockholders lose more value. Every penny you might make in stock comes out of their pocket.

nostrademons 4y ago

There are unfavorable tax implications for both the company and the employee if the strike price is different from the current fair market value of the company's stock.

erikpukinskis 4y ago
I believe it… what are those implications?
- nostrademons 4y ago
  In a nutshell, the difference between the fair market value of options and the strike price is considered income. That means the employee has to pay taxes on it in the tax year of the grant. It's non-cash compensation, which means the employee may not have the cash to pay those taxes, which can leave employees in the bind of owing the U.S. government money that they don't actually have. In the example you give here, where it would cost $100K to exercise your options, you would probably owe $30-40K in taxes if they granted them to you at close to zero cost, and you would still have only illiquid stock options (not even stock, which is what you get when you exercise the options). From the company perspective, they have to book this as a compensation expense, which means that their earnings are lower (perhaps negative), their burn rate is higher, their runway is shorter - and these are all the metrics that investors look at to determine if they're going to give the company more money, which can sink the company.
  - api 4y ago
    The whole system of option pricing and taxation is incredibly perverse. Why not just tax when liquidity is realized and cash is in the bank?
    - nostrademons 4y ago
      I agree with you, but I'll point out that there are a lot of voices today arguing to tax stocks, crypto, and other property the way stock options are today (eg. wealth tax; tax on crypto->crypto exchanges; proposed tax on unrealized capital gains). The idea that your wealth can increase without you being taxed on it seems to be very unpopular with the general population. Come to think of it, I wonder if the reason for taxing stock options the way they are is because otherwise there'd be a strong incentive to pay in stock rather than cash, and then everyone would be paying capital gains taxes instead of income, and then there'd be a strong call to tax capital gains at the same rates as income and the wealthy & powerful would not enjoy that.
      - deleted 4y ago
        [deleted]
    - s1artibartfast 4y ago
      Devils advocate: you are getting you something of value. What if your company payed you with 1,000 lotto tickets. Do you pay taxes on that only if you win? Options have a market value so they are compensation
      - api 4y ago
        Yeah, only if you win. Otherwise there isn’t any value. Do you pay taxes on a pat on the back?
        s1artibartfast 4y ago
        Options and lotto tickets obviously have value. Options cost money to purchase on an stock exchange.

treeface9000 4y ago

You can always do a "cashless exercise"... assuming your options are actually worth something. Essentially it auto sells enough shares to cover the cost to exercise and leaves you with the rest.

s1artibartfast 4y ago
This is situation depends on if the shares are transferable, if there is a market for exchange, and many other factors.
- treeface9000 4y ago

bombcar 4y ago

Because if the stock is valued at $10, and the strike price is $10 or above, the option is currently worthless. If the stock is valued at $10 and the strike price is $0.01, the option is currently worth $9.99. That's a big difference. Issuing an option with a low strike price would be better handled by issuing shares (which some companies do).

erikpukinskis 4y ago
> If the stock is valued at $10 and the strike price is $0.01, the option is currently worth $9.99. Right, but isn’t that a good thing? Then the employee gets some actual compensation, versus having to pay money for something that may have no value at all. > Issuing an option with a low strike price would be better handled by issuing shares Maybe that’s my real question then… why doesn’t every company issue shares? It would seem way more appealing to me.
- bombcar 4y ago
  Because most of these are issued when they’re completely unsellable. If they give you options and then go belly up you’re out nothing. If they give you $100k of shares (based on whatever last funding round) you now owe tax on that, and may not be able to write it off when it goes to zero until some time passes, and may never recover the tax if you never have enough capital gains to offset.

s1artibartfast 4y ago

>Why don’t companies just set the strike price at $0.01? In your example, it would cost them 100k, or likely more. Every option you exercise costs the company the value of the stock. If it costs you 100k, and is worth 1M, the company is loosing 900k. If the strike price was zero, they would be losing even more.

erikpukinskis 4y ago
Why would it cost them anything? They don’t pay anything when someone exercises their options, they just sign over a stock certificate. The shareholders maybe “lose” some value, but that’s the same as any stock offering. It’s a dilution event.
- s1artibartfast 4y ago
  Yes, the stockholders lose more value. Every penny you might make in stock comes out of their pocket.