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While you're right that exercising options can be very expensive and are a risky tax bet, we're talking about employee #2 in this case. They should've been able

While you're right that exercising options can be very expensive and are a risky tax bet, we're talking about employee #2 in this case. They should've been able to buy in early at a low price and tax bill if they really believed in the company: - Jan 2021: 3M seed round - Jan 2024: Series B valuing the company at 500M That's 3 years of vesting below a 1B company valuation, and 75% of a typical vesting schedule. There was plenty of opportunity to buy when valuations were low. There's also 83(b) election that allows one to prepay tax liabilities on stock options before they vest. Not buying stock options or doing a 83(b) election is also a bet that can place a cap on losses if the company goes downhill, but the risk flips if everything goes right.

toast0 1y ago
You want to say exercising options. Buying options is paying to have an option; you can easily buy options on publically traded stocks, for example. Exercising options is delivering money that covers the strike price to receive the shares... or delivering the shares to receive the strike price, if it was a sell/put option (which employment related options wouldn't be)
stouset 1y ago
I encourage you to put yourself in that person's shoes. It is never a simple decision. Yes, there is plenty of opportunity to exercise when valuations were low. But that also means you're buying before there's clear evidence that the company will be successful. It also still means you're out the cash to exercise the options before there's a market for those options and before you know that the company will actually go public and not crater for whatever reason. You also have no idea how much your shares will be diluted. Yes, exercising on day 1 optimizes your outcome in the case of a successful exit. But it is absolutely comically a poor choice for the 95% of cases where your equity ends up being worth next to nothing.
- ProfessorLayton 1y ago
  I'm speaking from experience. Yes, it means buying in before there's clear evidence of success, that's the risk! The lower the risk the lower the reward. Waiting until the company is worth billions of dollars before buying its stock is one of several options available, and each has its own risk/reward profile.
  - stouset 1y ago
    My point is that exercising the company’s stock early is fraught with risk and is in almost all cases a -EV play. Yes, the option technically exists. But without perfect foresight it’s not a good option. It’s not even an okay one. It’s an exceedingly bad one in most cases. Acting like this employee was silly for not dumping a huge sum of money into company shares before it was in a position to succeed is flatly ridiculous. Stock options are—as they currently stand—a lottery ticket that startups dangle in front of people’s faces that allow candidates to believe they will get fairly compensated for their labor, but with so much wiggle room that the company rarely has to ever make good on it. And I also say this from personal experience as employee. I was an employee ~#600 of a unicorn that went public. I ended up in something of the sweet spot of equity: most of the people who joined before me left before me and got less than I did in the end. Most people who joined after me got less equity at a worse strike price than I did. I did pretty good. And this was a rare raging success story. Most people did worse than me.
    - ProfessorLayton 1y ago
      > Acting like this employee was silly for not dumping a huge sum of money into company shares before it was in a position to succeed is flatly ridiculous. Once again we’re talking about employee #2, exercising early would not have been that expensive! They had access to a strike price and low tax liability that the vast majority of later employees would ever see. You are correct in that most shares in startups are worthless, but that’s orthogonal to exercise price and tax consequences. The calculus changes if/when the company becomes a unicorn, but by then the risk profile is much more favorable than when it was a scrappy startup, and returns are lower. > I also say this from personal experience as employee. I was an employee ~#600 of a unicorn that went public. I ended up in something of the sweet spot of equity: most of the people who joined before me left before me and got less than I did in the end. Most people who joined after me got less equity at a worse strike price than I did. Well one has to stay long enough to vest in order to keep the equity, being early isn’t enough. I don’t know your specifics so maybe you did make it out better than earlier employees, but some tricks companies use once they hit unicorn status (and have hundreds of employees) is stock splits. They want to pad their share grants for newer employees to make it seem more attractive and make the strike price lower. Of course earlier employees that exercised and left get their shares multiplied too.
- cloverich 1y ago
  IME the real issue is people don't know what or how to do it. If you're a pre-seed employee, you're going to be able to exercise 100% of your shares for a minuscule amount of money. But you need to know what to do and do it right away. In other cases, you may be later but have a higher strike price (expensive-ish to exercise), but its at least close to the valued price and in that case you can exercise without a major tax hit. But again usually people learn this after the valuation goes up and there's no way to go in reverse. So best we can do is share information here I guess, and perhaps advocate for some kind of regulation.

toast0 1y ago

You want to say exercising options. Buying options is paying to have an option; you can easily buy options on publically traded stocks, for example. Exercising options is delivering money that covers the strike price to receive the shares... or delivering the shares to receive the strike price, if it was a sell/put option (which employment related options wouldn't be)

stouset 1y ago

I encourage you to put yourself in that person's shoes. It is never a simple decision. Yes, there is plenty of opportunity to exercise when valuations were low. But that also means you're buying before there's clear evidence that the company will be successful. It also still means you're out the cash to exercise the options before there's a market for those options and before you know that the company will actually go public and not crater for whatever reason. You also have no idea how much your shares will be diluted. Yes, exercising on day 1 optimizes your outcome in the case of a successful exit. But it is absolutely comically a poor choice for the 95% of cases where your equity ends up being worth next to nothing.

ProfessorLayton 1y ago
I'm speaking from experience. Yes, it means buying in before there's clear evidence of success, that's the risk! The lower the risk the lower the reward. Waiting until the company is worth billions of dollars before buying its stock is one of several options available, and each has its own risk/reward profile.
- stouset 1y ago
  My point is that exercising the company’s stock early is fraught with risk and is in almost all cases a -EV play. Yes, the option technically exists. But without perfect foresight it’s not a good option. It’s not even an okay one. It’s an exceedingly bad one in most cases. Acting like this employee was silly for not dumping a huge sum of money into company shares before it was in a position to succeed is flatly ridiculous. Stock options are—as they currently stand—a lottery ticket that startups dangle in front of people’s faces that allow candidates to believe they will get fairly compensated for their labor, but with so much wiggle room that the company rarely has to ever make good on it. And I also say this from personal experience as employee. I was an employee ~#600 of a unicorn that went public. I ended up in something of the sweet spot of equity: most of the people who joined before me left before me and got less than I did in the end. Most people who joined after me got less equity at a worse strike price than I did. I did pretty good. And this was a rare raging success story. Most people did worse than me.
  - ProfessorLayton 1y ago
    > Acting like this employee was silly for not dumping a huge sum of money into company shares before it was in a position to succeed is flatly ridiculous. Once again we’re talking about employee #2, exercising early would not have been that expensive! They had access to a strike price and low tax liability that the vast majority of later employees would ever see. You are correct in that most shares in startups are worthless, but that’s orthogonal to exercise price and tax consequences. The calculus changes if/when the company becomes a unicorn, but by then the risk profile is much more favorable than when it was a scrappy startup, and returns are lower. > I also say this from personal experience as employee. I was an employee ~#600 of a unicorn that went public. I ended up in something of the sweet spot of equity: most of the people who joined before me left before me and got less than I did in the end. Most people who joined after me got less equity at a worse strike price than I did. Well one has to stay long enough to vest in order to keep the equity, being early isn’t enough. I don’t know your specifics so maybe you did make it out better than earlier employees, but some tricks companies use once they hit unicorn status (and have hundreds of employees) is stock splits. They want to pad their share grants for newer employees to make it seem more attractive and make the strike price lower. Of course earlier employees that exercised and left get their shares multiplied too.
cloverich 1y ago
IME the real issue is people don't know what or how to do it. If you're a pre-seed employee, you're going to be able to exercise 100% of your shares for a minuscule amount of money. But you need to know what to do and do it right away. In other cases, you may be later but have a higher strike price (expensive-ish to exercise), but its at least close to the valued price and in that case you can exercise without a major tax hit. But again usually people learn this after the valuation goes up and there's no way to go in reverse. So best we can do is share information here I guess, and perhaps advocate for some kind of regulation.