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Pinterest lets employees exercise options 7 years after leaving

422 points by ropiku 12y ago

staunch 12y ago
Employees should start refusing to work anywhere that does it the "standard" evil way.
caseyf7 12y ago
It's great they are giving new employees some flexibility here. It would be really hard to exercise a grant on an $11 billion valuation. Especially without knowing the details of the liquidation preferences.
t1m 12y ago
The US should follow Canada's lead and not tax exercised options until the stock is sold and actually becomes income. http://www.taxplanningguide.ca/tax-planning-guide/section-1-businesses/the-taxation-stock-options/ http://www.taxplanningguide.ca/tax-planning-guide/section-1-...
- walshemj 12y ago
  And the "socialist" UK which does this and even gives employee share options special exemptions eg you can transfer vested options into your ISA with no tax.
  - arethuza 12y ago
    Doesn't the company have to run an "approved" share option scheme to get all of the tax benefits? I've been offered "unapproved" options before (not recently though) and they would have been pretty ruinous as I think I would have to paid income tax on them and CGT on any gains.
    - walshemj 12y ago
      Well then your employer should have done an approved scheme - but GCT only applies when you sell and have a gain greater than your CGT allowance unlike the USA For non UK residents the first $16k of CGT in a year is not taxed.
      - arethuza 12y ago
        It was a small company with no outside investors and they didn't want to spend the money to get an approved scheme setup. I left before it became an issue for me. Of course, it's very early stage companies that you really want options in...
        walshemj 12y ago
        If they don't take care of their early employee's by doing things right then its huge red flag
  - mseebach 12y ago
    Can you elaborate on this? It sounds like it would be very useful for me in my current situation.
    - walshemj 12y ago
      I assume you in the UK? https://www.gov.uk/tax-employee-share-schemes/overview https://www.gov.uk/tax-employee-share-schemes/overview
- aero142 12y ago
  Even just only taxing it once it is sellable stock would be a huge improvement. Getting stuck with a taxbill for something you can't actually sell is ridiculous.
  - deleted 12y ago
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  - rsync 12y ago
    Phantom Stock: http://en.wikipedia.org/wiki/Phantom_stock http://en.wikipedia.org/wiki/Phantom_stock "Phantom stock grants and vesting agreements align employees' motives with owners' motives, i.e. increasing stock prices, while avoiding both taxable compensation and the need to give recipients voting or other rights typically associated with shares."
  - deleted 12y ago
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- hkmurakami 12y ago
  This would already be true in the states if not for AMT. :(
  - dlubarov 12y ago
    Only for ISOs though, not NSQOs.
  - 7Figures2Commas 12y ago
    Yes, there's the AMT trap for ISOs, but there's also an AMT credit that nobody ever seems to talk about, so net-net the AMT issue typically isn't as bad as some people make it out to be.
    - choppaface 12y ago
      AMT credit is useful, but typically the issue is that 1. the taxpayer may not have savings to cover initial AMT and 2. the underlying security is volatile and could lose all value. If the security is just taxed a the time of sale, then the taxpayer definitely has the funds to pay (and the amount can be straight-up withheld) and no complex AMT schedules have to be filed. AMT helps the government get paid sooner than later for fast-growing companies. This mechanism doesn't have to affect non-C-level execs to be effective.
      - 7Figures2Commas 12y ago
        You've made a better argument for revisiting the AMT than you have for revisiting the structure of ISOs.
- deleted 12y ago
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- GuiA 12y ago
  I exercised some ISOs recently and my accountant told me that they weren't taxed until I sold them?
  - ryan-c 12y ago
    In the US, the difference between "fair market value" and exercise price is subject to AMT. The short explanation is that if you exercise ISOs, you need to calculate your tax under AMT rules (which consider the spread taxable income) as well as normal rules and pay whichever is more.
- wdr1 12y ago
  It'll never happen. It'll be perceived as yet another tax break for the rich/well-off. :(
arenaninja 12y ago
This is sensible. Bravo Pinterest
jedberg 12y ago
FWIW, Netflix gives you 10 years. Despite the fact that I left a few weeks ago, I still have about six years left to exercise them.
- mrgriscom 12y ago
  Why haven't you? Aren't they public?
  - fsk 12y ago
    If the options aren't that far in-the-money, and he doesn't need the cash now, it's actually better to wait to exercise. If he exercises now, he only gets the raw value (current price - strike). If he waits to exercise, he get the time-value of money and implied leverage (he doesn't have to cough up the strike until he exercises), and the optionality part (if Netflix goes below the strike, he can decline to exercise). He also can hedge by short-selling (and lock in a sure profit no matter what), but you'd need a big-value account at a brokerage to hedge on favorable terms.
    - beagle3 12y ago
      But if he doesn't hold the stock for at least one year, he gets short-term capital gains rate of 35%, rather than the long-term one of 15%, which might tip the scale the other way. But then again, if he exercises in one year and does not sell that year, he gets the tax bill in the exercise year, potentially with no way to cover it. It's a lot more complicated than it should be.
    - jedberg 12y ago
      > He also can hedge by short-selling (and lock in a sure profit no matter what), but you'd need a big-value account at a brokerage to hedge on favorable terms. It's interesting, because I thought about this. When I worked for the company I wasn't allowed to hedge, because you can't buy shorts in the company you work for. Now that I'm out I can, but the problem is, the company gave me such good options there is no way I can buy an opposite option for the hedge. For example, there is no retail short for more than two years, but my options still have between 6 and 9 years left.
dlu 12y ago
Hey look, it's something Sam Altman suggested, but happening in real life
justicezyx 12y ago
Somehow I always view pinterest as the best startup example. I have no idea how I developed the idea, but that seems to be the case from all the things I know of.
habosa 12y ago
This is really great, I hope more startups follow. In today's funding environment startups that are angling for an IPO can stay private for a very long time. Many companies are raising billions of dollars over 5-10 rounds before looking to the public markets. That can mean a long time before employees may choose to exercise their options. Pinterest seems to recognize that if you put in two years at an early stage of the company you deserve to share in future financial success. I wonder why they made this move now? Specifically, I wonder if it came from the executives, investors, or both?
sandofsky 12y ago
I'm curious about how this works. I thought, legally, ISOs must expire within 3 months of leaving the company. Assuming they've been issuing ISOs up to now, are they converting them to something else, like NQSOs or RSUs?
- ssorallen 12y ago
  They automatically convert from ISOs to NSOs according to Sam Altman's post[1]: > There are some tricky issues around this—for example, the options will automatically convert from ISOs to NSOs 3 months after employment terminates (if applicable) but it’s still far better than just losing the assets. [1] http://blog.samaltman.com/employee-equity http://blog.samaltman.com/employee-equity
- caseyf7 12y ago
  ISOs are rare these days. If you have stock options, they are probably NQSOs. ISOs had too many restrictions so most companies stopped using them.
  - ssorallen 12y ago
    What restrictions do you mean? ISOs are better for the employee because any gain on exercise is not taxed as regular income. If the value is high enough the employee might be subject to alternative minimum tax (AMT), but the possibility of paying no tax is a benefit over NSOs whose gain is taxed as regular income and is subject to tax withholding.
    - caseyf7 12y ago
      With ISOs, at least 2 years must lapse between the grant date and the employee’s sale of the stock, and at least one year must lapse between the exercise date and the sale of the stock. (This is a restriction - not related to capital gain treatment) If NSOs are granted with a strike price equal to FMV, there are no taxes due until exercise. If granted at a discount, taxes are due on the difference between grant price and FMV.
bobsky 12y ago
Bravo. More companies that support this trend the better for the rest of us* (the non founders cohort that is). This movement only makes me appreciate the management and culture of Pinterest; quite the opposite of the Zynga fiasco [1][2] [1] http://www.cnet.com/news/zynga-to-employees-give-back-our-stock-or-youll-be-fired/ http://www.cnet.com/news/zynga-to-employees-give-back-our-st... [2] http://www.cnet.com/news/zynga-uses-stock-options-to-keep-employees-put-report-says/ http://www.cnet.com/news/zynga-uses-stock-options-to-keep-em...
- brandonmenc 12y ago
  Zynga clawed back shares from underperforming founding executives, not rank-and-file employees, right? Not that you were, but that episode always seems to be painted as though Pincus were yanking options away from sub-$100k/yr employees in the trenches. disclaimer: I'm not defending Zynga in general, nor am I trying to take the shine off of Pinterest's policy.
  - ekanes 12y ago
    Sure, but if an executive is under-performing, you fire them. You don't go back and change their deal.
  - skunkworks 12y ago
    Correct. Their lesson was that you shouldn't claw back equity from underperforming executives, you should just let them go.
    - fsk 12y ago
      How do you know they were underperforming? Maybe the board just realized they could get a lot of extra money by looking for an excuse to get rid of them?
      - skunkworks 12y ago
        Your speculative conspiracy theory is plausible, but I work with one of the people who made this decision.
mblevin 12y ago
This is a great move and incredibly employee-friendly. We'll see if this is the beginning of other companies following suit, but I doubt it. As has been discussed before it's not the mechanics that matter here, but rather the psychology of founders. More often than not, there is the belief that even if you've been an employee for 2+ years, if you're not "in it for the long haul" then you don't deserve to hold on to your equity without paying for it in cash (or taking the tax hit). Not to mention there's very little incentive to amend these policies outside of generating general goodwill.
- amirnathoo 12y ago
  > Not to mention there's very little incentive to amend these policies outside of generating general goodwill. There is now an incentive for other companies to follow suit since savvy employees will value offers from Pinterest and other companies with this policy much more highly. It's rare that a company like Pinterest breaks ranks on things like this. I hope they get a lot of goodwill from employees and applicants as a result.
jpmattia 12y ago
Looks like the Fortune article missed a big point: The exercise of the options often requires a big pile of money to be paid by the leaving employee to the company (ie, the strike price of the option. This occurs regardless of tax issues.) The advantage is seeing how well the stock performs, then performing the exercise. If the company has gone public, then no real money needs to be put up by the employee; Exercise and sale can occur in one fell swoop.
- ssorallen 12y ago
  > Exercise and sale can occur in one fell swoop. You lose the reduced taxes of long term capital gains if you wait, for whatever reason, to exercise and sell the same day. You have to hold the shares for 1 year + 1 day from the day you exercise for the subsequent sale to be taxed as long term capital gains. For even the top tax bracket, the difference is 20% in taxes.
  - deleted 12y ago
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  - jpmattia 12y ago
    That's correct, but remember that stocks go both up and down. Back in the bubble, a lot of people got very burned: They tried to save the diff between short- and long-term cap gains and ended up losing far more because of variations in price. To add insult to injury, many got nailed by AMT at the point of exercise. By the time they figured this out, the entire grant would not cover the bill to the Feds.
    - ssorallen 12y ago
      Yup I've heard some of those stories. A 7-year exercise period certainly gives employees more options.
    - hkmurakami 12y ago
      Companies allowing current employees to exercise options 1+ year before a liquidity event would prevent the tax issue. For a company like Pinterest that is virtually guaranteed to have a good liquidity event, the risk of losing your principal is minimal and you are likely being paid enough in salary to afford the early exercise strike price.
deleted 12y ago
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bagels 12y ago
What argument is there for this policy against the employer, besides it's a nice thing to do? The employer benefits from having the options expire because people will be less encouraged to leave with the current standard of expiring options.
- dlubarov 12y ago
  It would make their offers more appealing to prospective employees with limited capital.
- pdpi 12y ago
  It reduces anxiety. Say you are slightly unhappy at your current job. On a normal stock plan, you might start feeling that "golden handcuffs are tying me to this company", which makes you feel even worse about your position, and might actually precipitate you leaving. Now, consider this policy instead. You'd get a feeling of "I could leave if I really wanted to, nothing is tying me to this place". You get a greater feeling of agency, of personal freedom. That relaxes you, and you feel more comfortable staying with the company.
- kenrikm 12y ago
  The employer does not benefit from having an employee hanging around just because they can't afford to exercise their options. If they want to leave but can't because they have this huge potential for loss hanging over them does the company really benefit from having them there when they don't want to be?
- brown9-2 12y ago
  The employer has to weigh two options: - people will be less encouraged to leave with the current standard of expiring options. - people who have checked out mentally will not be forced to stay with the company for financial reasons.
- bsder 12y ago
  > What argument is there for this policy against the employer, besides it's a nice thing to do? You don't get stuck with an unmotivated employee who has checked out but can't access his options in liquid form. This is not an infrequent problem in startups. The folks who "storm the bastions" early on often do not have the skills nor the desire to be a "well-behaved corporate citizen" for IPOs and such.
r0naa 12y ago
Wow. That's amazing, Pinterest is amazing! This is a great move: Pinterest you rocks!
rokhayakebe 12y ago
Why companies give early employees options to "buy" stocks? Why can't they just be granted once vested and be done?
- wpietri 12y ago
  Taxes, mainly. If you are very early, when the company is worth nothing, then the company can give you a big chunk of stock with no tax consequences. But once the company is worth something, then getting the stock is income, and you have to pay taxes immediately on the market value. It's not as good from the company tax perspective, either. It's also a problem in that if the stock is already valuable, giving you the stock is the wrong reward structure. Companies are giving you options so that you have an interest in the stock going up. Suppose when you show up the share value is $40 and they give you 1,000 shares. if while you're there the stock goes up to $60, you will have received something worth $60,000, even though you only contributed to creating $20,000 of that. With options, they can give you 3,000 options with a strike price of $40. If the stock goes up to $60, then you still make $60,000 ($20 gain * 3000 options). But if it doesn't go up at all, then your options would be worthless.
  - dlubarov 12y ago
    > you only contributed to creating $20,000 of that That's an interesting way to think about it, but as long as the employee is getting a base salary, the employer couldn't justify granting enough options to achieve this goal of compensation being equal to (theoretical) value added. If we consider base salary fixed, then options are more leveraged, but a similar reward structure could be achieved by granting the same number of RSUs and reducing base salary by the exercise cost.
    - wpietri 12y ago
      Sorry, I didn't mean to suggest that the goal was for compensation to be equal to value added. I think the goal is for it to be proportional, or at least more proportional than a pure stock grant would be.
- 12y ago
mherdeg 12y ago
Is that a better deal than Quora's "you may exercise options within 10 years of grant date, whether or not you still work for the company"? Per http://blog.samaltman.com/employee-equity http://blog.samaltman.com/employee-equity .
- codezero 12y ago
  Really depends on the average tenure of the employees. In general, I think Pinterest's is better. Also, Quora only offered that to employees recently, 5 years after the company started, so any employees that left before 2014 when that was enacted wouldn't be entitled. It's possible the same is true for Pinterest though.
choppaface 12y ago
I've nearly gone bankrupt due to AMT on ISOs, and I've also been forced to put up considerable money to exercise Non-Quals after leaving the company. I definitely applaud Pinterest's move here. My former employer went public, the top execs are still making a ton of money, and yet Finance still hasn't implemented a similar post-termination plan. A lot of former colleagues are still at the company due to 'mildly-golden' handcuffs-- the tax liability that their options present is now large and complicated. Companies that fail to adopt changes like these disadvantage themselves in a variety of subtle but important ways. What would be even better is if smaller companies / start-ups just did 83(b) elections up-front (say on day one or year one upon cliff). Another (for larger companies) option is to just offer RSUs. The bottom line is that opportunities via tax law complexity are not particularly motivating to the majority of employees (i.e. ICs), and yet ICs are the most likely to suffer near-bankruptcy due to unexpected income tax. This is a nice step in the direction of transferring deserved wealth from 'the top' to ICs, but there's still plenty of progress to be had.
- darkarmani 12y ago
  > What would be even better is if smaller companies / start-ups just did 83(b) elections up-front (say on day one or year one upon cliff). Another (for larger companies) option is to just offer RSUs. I was giving the choice and I elected 1/2 RSUs and 1/2 stock.
  - choppaface 12y ago
    Curious, why didn't you take 100% RSUs? Would they have just given you fewer RSUs?
    - darkarmani 12y ago
      Well the RSUs required one of two things: laying down a whole lot of money to purchase them up front or accepting the loan and promissory note from the company. I'm the only one that went 50/50. I had thought i was being clever and getting the options first (highest risk in first 2 years) and the RSUs second, but it turns out that even though i had a vesting schedule like that it was valid because the board would have had to vote on something like that. It's almost moot at this point though.
Eridrus 12y ago
Early exercise still seems like a better option than waiting if there is a positive exit event since you get to pay capital gains rates, rather than income tax rates if you hold it for more than a year. It certainly depends on how much risk you're willing to take on though.
atishd 12y ago
Here are a couple of must-reads if you have received ISO, NSO, RSUs: https://equityzen.com/blog/understanding-rsus-like-your-boss/ https://equityzen.com/blog/understanding-rsus-like-your-boss... https://equityzen.com/blog/understanding-equity-compensation-for-startup-employees/ https://equityzen.com/blog/understanding-equity-compensation... Disclaimer: I'm with EquityZen. EquityZen helps employees get liquidity for some of their options/shares before the company exits, so not only can they afford the exercise, but also finance life events.
grellas 12y ago
A few technical points: 1. U.S. tax law requires that incentive stock options (ISOs) have a 90-day termination tail on them - that is, the options do not qualify as ISOs if they are not issued under an enforceable agreement by which all vested options must be exercised within 90 days of termination of employment or expire. 2. As a direct result of point 1, the near-universal practice that startups use when issuing stock options is to require employees to sign documentation by which they agree that they lose even their vested options if they do not exercise them within 90 days of their termination date. 3. The original idea behind ISOs (the reason for distinguishing them from "non-statutory" or "non-qualified" options) is that they can be exercised at any time after they vest without triggering ordinary income tax for the exercising employee at the time of exercise (subject to certain monetary limits). 4. However, the "benefit" note in item 3 above, though a very real benefit in days gone by, is often illusory today because the exercise of ISOs requires that the amount of the spread (difference between exercise price and fair market value of the stock at the time of exercise) be included as an item of AMT - meaning that a so-called "ISO" exercise can result in a huge AMT tax. What this means is that an employee holding vested options in a startup whose value has risen greatly faces a dilemma. "Do I exercise now, pay a huge tax, hold only a piece of paper that may or may not be worth anything down the road, and hope that the stock price holds? Or do I wait until a liquidation event, exercise at that time, and thus eliminate the large tax risk of exercising before that time?" 5. Of course, many such employees chose to wait. If you cannot sell your stock right away, it is a very high risk to pay a massive tax on an option exercise only to wind up holding illiquid stock that may become valueless if things don't go right. This is no small issue. People committed suicide during the dot-bust era a decade or so ago after having made the wrong decision. 6. The problem is exacerbated by the 90-day expiration rule on employee termination. It is one thing to wait and wait until the liquidation event. But what if it is a long time in coming? Many employees are trapped in their employment when they face the above dilemma because leaving their employment will force them to exercise or lose potentially valuable options if they don't exercise within 90 days of termination. Even worse, if their employment is terminated by the company, they are put in the horrible position of losing something they worked very hard for because of a seemingly arbitrary and stupid rule saying that the options expire within 90 days of termination. 7. Well, guess what, the rule is stupid and arbitrary in many ways. Why? Because, though the law requires that it be made part of any ISO grant, this does not mean that the startup cannot modify the agreement for the benefit of the employee to eliminate the 90-day expiration provision and to give the employee room to exercise for an extended period. What happens when the company does this in spite of the tax rules? Well, it means that the option loses its character as an ISO. But it does not lose its character as a legally enforceable stock option. It just means that it is taxed as an NQO (non-qualified option). So, in a worst case, the employee exercising an NQO gets immediately taxed on the spread at the time of exercise. But, if that modification gives the employee the flexibility to carry the options unexercised but exercisable for a period going well beyond the 90-day period currently defining expiration of such options, the employee can leave employment, hold the options, and wait for such extended period (e.g., the 7 years discussed in the article here) before deciding whether to take the tax risk of exercising and holding illiquid shares. And, if, in the interim, the company does have a liquidation event, then the employee's dilemma vanishes and he can exercise and sell right away in order to make the profit and pay the associated taxes. 8. The net result of the startup's agreeing to eliminate the 90-day provision is that employees need no longer feel trapped in their employment once their options have vested when the stock price becomes high. They can leave and still keep the option of cashing in on their hard-earned options. 9. So why don't most companies agree to such modifications? Their lawyers will tell you that the law requires the 90-day rule and this is true but misleading because that requirement can be violated in a lawful way that simply changes the character of the options. Thus, if the parties can live with the change, why not do it routinely? Well, I leave it to everyone to draw his own conclusions. Perhaps startups want to keep their employees trapped. Perhaps they are just listening to lawyers who insist on following the rules. Or perhaps a board of directors does not feel it consistent with fiduciary duties to give employees something that appears to be a gratuitous modification that does not benefit the company. Whatever the reason, it remains true that most startups choose to leave their employees trapped in this dilemma without even giving them a good explanation beyond the fact they agreed to the condition and that the the tax laws "require" it. In any case, kudos to Pinterest for doing the decent thing here. It is indeed all too rare to see something like this and they are to be congratulated for it.
JonFish85 12y ago
One thing I don't see addressed is what this means regarding dilution and such. With something like this, is the company more likely to dilute its stock to try to dilute out people who have long since left the company? If Joe Schmoe leaves the company with, say, .05% of the company, and in 7 years those shares would be worth $25m or something, wouldn't the company want to dilute that person out in order to give their current employees value? I guess I don't really see what the big deal is on this. It would seem to me that the company would aggressively issue more stock to ensure that anyone who left the company 7 years ago couldn't possibly control more stock than current employees.
- dlubarov 12y ago
  As long as the board doesn't do anything really shady, dilution generally affects all shareholders equally. (Well, the effect can be slightly different for preferred stock holders, but at least former employees will generally be in the same boat as founders and current employees.)
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throwaway3010 12y ago
I brought this up recently in a negotiation and the response was that 5-10 year exercise timelines would hinder an acquisition. Makes no sense to me, but is this a real possibility?
vinceyuan 12y ago
Wow! Pinterest is so generous! In my previous company, I had to exercise my options in 3 months after leaving. Now that stock's price increased by 50%.
luckydude 12y ago
We've been trying to figure out how to do this, does anyone have the legal language that says how this works?
pcarolan 12y ago
Way to set a good example.
downandout 12y ago
This ties into the whole issue with bloated valuations [1]. VC's are paying for preferred shares and other deal points that make all classes of shares appear to outsiders to be vastly more valuable than they are. Employees then wind up paying inflated taxes on value that doesn't actually exist. The valuations are mostly made up, but the taxes are very real. [1] http://www.bloomberg.com/news/articles/2015-03-17/the-fuzzy-insane-math-that-s-creating-so-many-billion-dollar-tech-companies http://www.bloomberg.com/news/articles/2015-03-17/the-fuzzy-...
- dlubarov 12y ago
  But taxes are normally paid based on the latest 409a valuation, which can be way below the preferred stock value from the latest funding round. My impression is that companies rarely sell common stock to investors for that reason (among others). Since investors valued the preferred stock, common stock holders can ignore their massive valuation for tax purposes, and use the 409a.
  - downandout 12y ago
    Still, an appraiser brought in to do a 409a valuation wouldn't be doing their job if they completely ignored the valuation from the latest funding round. The value will be lower by a subjective amount determined by the appraiser, but is still likely to be somewhat inflated if the preferred rounds were also inflated.
cbhl 12y ago
Why is this better than Pinterest covering the tax bill for employees that leave and/or are terminated? Is the latter impossible or impractical for some reason?
throwaway85 12y ago
Love this move. I, like many here, am feeling this squeeze after being terminated from a startup in the 1B club. I need to decide to exercise or not. I don't have the cash for the taxes. Does anyone who has found buyers for their private stock without the company's blessing care to post about their experience? Any recommendations for brokers or investment groups that engage in such transactions but aren't predatory? What snags did you run into and how long did the process take?
- mavelikara 12y ago
  http://www.esofund.com/ http://www.esofund.com/

422 points by ropiku 12y ago

Employees should start refusing to work anywhere that does it the "standard" evil way.

It's great they are giving new employees some flexibility here. It would be really hard to exercise a grant on an $11 billion valuation. Especially without knowing the details of the liquidation preferences.

t1m 12y ago

The US should follow Canada's lead and not tax exercised options until the stock is sold and actually becomes income. http://www.taxplanningguide.ca/tax-planning-guide/section-1-businesses/the-taxation-stock-options/ http://www.taxplanningguide.ca/tax-planning-guide/section-1-...

walshemj 12y ago
And the "socialist" UK which does this and even gives employee share options special exemptions eg you can transfer vested options into your ISA with no tax.
- arethuza 12y ago
  Doesn't the company have to run an "approved" share option scheme to get all of the tax benefits? I've been offered "unapproved" options before (not recently though) and they would have been pretty ruinous as I think I would have to paid income tax on them and CGT on any gains.
  - walshemj 12y ago
    Well then your employer should have done an approved scheme - but GCT only applies when you sell and have a gain greater than your CGT allowance unlike the USA For non UK residents the first $16k of CGT in a year is not taxed.
    - arethuza 12y ago
      It was a small company with no outside investors and they didn't want to spend the money to get an approved scheme setup. I left before it became an issue for me. Of course, it's very early stage companies that you really want options in...
      - walshemj 12y ago
        If they don't take care of their early employee's by doing things right then its huge red flag
- mseebach 12y ago
  Can you elaborate on this? It sounds like it would be very useful for me in my current situation.
  - walshemj 12y ago
    I assume you in the UK? https://www.gov.uk/tax-employee-share-schemes/overview https://www.gov.uk/tax-employee-share-schemes/overview
aero142 12y ago
Even just only taxing it once it is sellable stock would be a huge improvement. Getting stuck with a taxbill for something you can't actually sell is ridiculous.
- deleted 12y ago
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- rsync 12y ago
  Phantom Stock: http://en.wikipedia.org/wiki/Phantom_stock http://en.wikipedia.org/wiki/Phantom_stock "Phantom stock grants and vesting agreements align employees' motives with owners' motives, i.e. increasing stock prices, while avoiding both taxable compensation and the need to give recipients voting or other rights typically associated with shares."
- deleted 12y ago
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hkmurakami 12y ago
This would already be true in the states if not for AMT. :(
- dlubarov 12y ago
  Only for ISOs though, not NSQOs.
- 7Figures2Commas 12y ago
  Yes, there's the AMT trap for ISOs, but there's also an AMT credit that nobody ever seems to talk about, so net-net the AMT issue typically isn't as bad as some people make it out to be.
  - choppaface 12y ago
    AMT credit is useful, but typically the issue is that 1. the taxpayer may not have savings to cover initial AMT and 2. the underlying security is volatile and could lose all value. If the security is just taxed a the time of sale, then the taxpayer definitely has the funds to pay (and the amount can be straight-up withheld) and no complex AMT schedules have to be filed. AMT helps the government get paid sooner than later for fast-growing companies. This mechanism doesn't have to affect non-C-level execs to be effective.
    - 7Figures2Commas 12y ago
      You've made a better argument for revisiting the AMT than you have for revisiting the structure of ISOs.
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GuiA 12y ago
I exercised some ISOs recently and my accountant told me that they weren't taxed until I sold them?
- ryan-c 12y ago
  In the US, the difference between "fair market value" and exercise price is subject to AMT. The short explanation is that if you exercise ISOs, you need to calculate your tax under AMT rules (which consider the spread taxable income) as well as normal rules and pay whichever is more.
wdr1 12y ago
It'll never happen. It'll be perceived as yet another tax break for the rich/well-off. :(

arenaninja 12y ago

This is sensible. Bravo Pinterest

jedberg 12y ago

FWIW, Netflix gives you 10 years. Despite the fact that I left a few weeks ago, I still have about six years left to exercise them.

mrgriscom 12y ago
Why haven't you? Aren't they public?
- fsk 12y ago
  If the options aren't that far in-the-money, and he doesn't need the cash now, it's actually better to wait to exercise. If he exercises now, he only gets the raw value (current price - strike). If he waits to exercise, he get the time-value of money and implied leverage (he doesn't have to cough up the strike until he exercises), and the optionality part (if Netflix goes below the strike, he can decline to exercise). He also can hedge by short-selling (and lock in a sure profit no matter what), but you'd need a big-value account at a brokerage to hedge on favorable terms.
  - beagle3 12y ago
    But if he doesn't hold the stock for at least one year, he gets short-term capital gains rate of 35%, rather than the long-term one of 15%, which might tip the scale the other way. But then again, if he exercises in one year and does not sell that year, he gets the tax bill in the exercise year, potentially with no way to cover it. It's a lot more complicated than it should be.
  - jedberg 12y ago
    > He also can hedge by short-selling (and lock in a sure profit no matter what), but you'd need a big-value account at a brokerage to hedge on favorable terms. It's interesting, because I thought about this. When I worked for the company I wasn't allowed to hedge, because you can't buy shorts in the company you work for. Now that I'm out I can, but the problem is, the company gave me such good options there is no way I can buy an opposite option for the hedge. For example, there is no retail short for more than two years, but my options still have between 6 and 9 years left.

dlu 12y ago

Hey look, it's something Sam Altman suggested, but happening in real life

justicezyx 12y ago

Somehow I always view pinterest as the best startup example. I have no idea how I developed the idea, but that seems to be the case from all the things I know of.

habosa 12y ago

This is really great, I hope more startups follow. In today's funding environment startups that are angling for an IPO can stay private for a very long time. Many companies are raising billions of dollars over 5-10 rounds before looking to the public markets. That can mean a long time before employees may choose to exercise their options. Pinterest seems to recognize that if you put in two years at an early stage of the company you deserve to share in future financial success. I wonder why they made this move now? Specifically, I wonder if it came from the executives, investors, or both?

sandofsky 12y ago

I'm curious about how this works. I thought, legally, ISOs must expire within 3 months of leaving the company. Assuming they've been issuing ISOs up to now, are they converting them to something else, like NQSOs or RSUs?

ssorallen 12y ago
They automatically convert from ISOs to NSOs according to Sam Altman's post[1]: > There are some tricky issues around this—for example, the options will automatically convert from ISOs to NSOs 3 months after employment terminates (if applicable) but it’s still far better than just losing the assets. [1] http://blog.samaltman.com/employee-equity http://blog.samaltman.com/employee-equity
caseyf7 12y ago
ISOs are rare these days. If you have stock options, they are probably NQSOs. ISOs had too many restrictions so most companies stopped using them.
- ssorallen 12y ago
  What restrictions do you mean? ISOs are better for the employee because any gain on exercise is not taxed as regular income. If the value is high enough the employee might be subject to alternative minimum tax (AMT), but the possibility of paying no tax is a benefit over NSOs whose gain is taxed as regular income and is subject to tax withholding.
  - caseyf7 12y ago
    With ISOs, at least 2 years must lapse between the grant date and the employee’s sale of the stock, and at least one year must lapse between the exercise date and the sale of the stock. (This is a restriction - not related to capital gain treatment) If NSOs are granted with a strike price equal to FMV, there are no taxes due until exercise. If granted at a discount, taxes are due on the difference between grant price and FMV.

bobsky 12y ago

Bravo. More companies that support this trend the better for the rest of us* (the non founders cohort that is). This movement only makes me appreciate the management and culture of Pinterest; quite the opposite of the Zynga fiasco [1][2] [1] http://www.cnet.com/news/zynga-to-employees-give-back-our-stock-or-youll-be-fired/ http://www.cnet.com/news/zynga-to-employees-give-back-our-st... [2] http://www.cnet.com/news/zynga-uses-stock-options-to-keep-employees-put-report-says/ http://www.cnet.com/news/zynga-uses-stock-options-to-keep-em...

brandonmenc 12y ago
Zynga clawed back shares from underperforming founding executives, not rank-and-file employees, right? Not that you were, but that episode always seems to be painted as though Pincus were yanking options away from sub-$100k/yr employees in the trenches. disclaimer: I'm not defending Zynga in general, nor am I trying to take the shine off of Pinterest's policy.
- ekanes 12y ago
  Sure, but if an executive is under-performing, you fire them. You don't go back and change their deal.
- skunkworks 12y ago
  Correct. Their lesson was that you shouldn't claw back equity from underperforming executives, you should just let them go.
  - fsk 12y ago
    How do you know they were underperforming? Maybe the board just realized they could get a lot of extra money by looking for an excuse to get rid of them?
    - skunkworks 12y ago
      Your speculative conspiracy theory is plausible, but I work with one of the people who made this decision.

mblevin 12y ago

This is a great move and incredibly employee-friendly. We'll see if this is the beginning of other companies following suit, but I doubt it. As has been discussed before it's not the mechanics that matter here, but rather the psychology of founders. More often than not, there is the belief that even if you've been an employee for 2+ years, if you're not "in it for the long haul" then you don't deserve to hold on to your equity without paying for it in cash (or taking the tax hit). Not to mention there's very little incentive to amend these policies outside of generating general goodwill.

amirnathoo 12y ago
> Not to mention there's very little incentive to amend these policies outside of generating general goodwill. There is now an incentive for other companies to follow suit since savvy employees will value offers from Pinterest and other companies with this policy much more highly. It's rare that a company like Pinterest breaks ranks on things like this. I hope they get a lot of goodwill from employees and applicants as a result.

jpmattia 12y ago

Looks like the Fortune article missed a big point: The exercise of the options often requires a big pile of money to be paid by the leaving employee to the company (ie, the strike price of the option. This occurs regardless of tax issues.) The advantage is seeing how well the stock performs, then performing the exercise. If the company has gone public, then no real money needs to be put up by the employee; Exercise and sale can occur in one fell swoop.

ssorallen 12y ago
> Exercise and sale can occur in one fell swoop. You lose the reduced taxes of long term capital gains if you wait, for whatever reason, to exercise and sell the same day. You have to hold the shares for 1 year + 1 day from the day you exercise for the subsequent sale to be taxed as long term capital gains. For even the top tax bracket, the difference is 20% in taxes.
- deleted 12y ago
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- jpmattia 12y ago
  That's correct, but remember that stocks go both up and down. Back in the bubble, a lot of people got very burned: They tried to save the diff between short- and long-term cap gains and ended up losing far more because of variations in price. To add insult to injury, many got nailed by AMT at the point of exercise. By the time they figured this out, the entire grant would not cover the bill to the Feds.
  - ssorallen 12y ago
    Yup I've heard some of those stories. A 7-year exercise period certainly gives employees more options.
  - hkmurakami 12y ago
    Companies allowing current employees to exercise options 1+ year before a liquidity event would prevent the tax issue. For a company like Pinterest that is virtually guaranteed to have a good liquidity event, the risk of losing your principal is minimal and you are likely being paid enough in salary to afford the early exercise strike price.

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bagels 12y ago

What argument is there for this policy against the employer, besides it's a nice thing to do? The employer benefits from having the options expire because people will be less encouraged to leave with the current standard of expiring options.

dlubarov 12y ago
It would make their offers more appealing to prospective employees with limited capital.
pdpi 12y ago
It reduces anxiety. Say you are slightly unhappy at your current job. On a normal stock plan, you might start feeling that "golden handcuffs are tying me to this company", which makes you feel even worse about your position, and might actually precipitate you leaving. Now, consider this policy instead. You'd get a feeling of "I could leave if I really wanted to, nothing is tying me to this place". You get a greater feeling of agency, of personal freedom. That relaxes you, and you feel more comfortable staying with the company.
kenrikm 12y ago
The employer does not benefit from having an employee hanging around just because they can't afford to exercise their options. If they want to leave but can't because they have this huge potential for loss hanging over them does the company really benefit from having them there when they don't want to be?
brown9-2 12y ago
The employer has to weigh two options: - people will be less encouraged to leave with the current standard of expiring options. - people who have checked out mentally will not be forced to stay with the company for financial reasons.
bsder 12y ago
> What argument is there for this policy against the employer, besides it's a nice thing to do? You don't get stuck with an unmotivated employee who has checked out but can't access his options in liquid form. This is not an infrequent problem in startups. The folks who "storm the bastions" early on often do not have the skills nor the desire to be a "well-behaved corporate citizen" for IPOs and such.

r0naa 12y ago

Wow. That's amazing, Pinterest is amazing! This is a great move: Pinterest you rocks!

rokhayakebe 12y ago

Why companies give early employees options to "buy" stocks? Why can't they just be granted once vested and be done?

wpietri 12y ago
Taxes, mainly. If you are very early, when the company is worth nothing, then the company can give you a big chunk of stock with no tax consequences. But once the company is worth something, then getting the stock is income, and you have to pay taxes immediately on the market value. It's not as good from the company tax perspective, either. It's also a problem in that if the stock is already valuable, giving you the stock is the wrong reward structure. Companies are giving you options so that you have an interest in the stock going up. Suppose when you show up the share value is $40 and they give you 1,000 shares. if while you're there the stock goes up to $60, you will have received something worth $60,000, even though you only contributed to creating $20,000 of that. With options, they can give you 3,000 options with a strike price of $40. If the stock goes up to $60, then you still make $60,000 ($20 gain * 3000 options). But if it doesn't go up at all, then your options would be worthless.
- dlubarov 12y ago
  > you only contributed to creating $20,000 of that That's an interesting way to think about it, but as long as the employee is getting a base salary, the employer couldn't justify granting enough options to achieve this goal of compensation being equal to (theoretical) value added. If we consider base salary fixed, then options are more leveraged, but a similar reward structure could be achieved by granting the same number of RSUs and reducing base salary by the exercise cost.
  - wpietri 12y ago
    Sorry, I didn't mean to suggest that the goal was for compensation to be equal to value added. I think the goal is for it to be proportional, or at least more proportional than a pure stock grant would be.
12y ago

mherdeg 12y ago

Is that a better deal than Quora's "you may exercise options within 10 years of grant date, whether or not you still work for the company"? Per http://blog.samaltman.com/employee-equity http://blog.samaltman.com/employee-equity .

codezero 12y ago
Really depends on the average tenure of the employees. In general, I think Pinterest's is better. Also, Quora only offered that to employees recently, 5 years after the company started, so any employees that left before 2014 when that was enacted wouldn't be entitled. It's possible the same is true for Pinterest though.

choppaface 12y ago

I've nearly gone bankrupt due to AMT on ISOs, and I've also been forced to put up considerable money to exercise Non-Quals after leaving the company. I definitely applaud Pinterest's move here. My former employer went public, the top execs are still making a ton of money, and yet Finance still hasn't implemented a similar post-termination plan. A lot of former colleagues are still at the company due to 'mildly-golden' handcuffs-- the tax liability that their options present is now large and complicated. Companies that fail to adopt changes like these disadvantage themselves in a variety of subtle but important ways. What would be even better is if smaller companies / start-ups just did 83(b) elections up-front (say on day one or year one upon cliff). Another (for larger companies) option is to just offer RSUs. The bottom line is that opportunities via tax law complexity are not particularly motivating to the majority of employees (i.e. ICs), and yet ICs are the most likely to suffer near-bankruptcy due to unexpected income tax. This is a nice step in the direction of transferring deserved wealth from 'the top' to ICs, but there's still plenty of progress to be had.

darkarmani 12y ago
> What would be even better is if smaller companies / start-ups just did 83(b) elections up-front (say on day one or year one upon cliff). Another (for larger companies) option is to just offer RSUs. I was giving the choice and I elected 1/2 RSUs and 1/2 stock.
- choppaface 12y ago
  Curious, why didn't you take 100% RSUs? Would they have just given you fewer RSUs?
  - darkarmani 12y ago
    Well the RSUs required one of two things: laying down a whole lot of money to purchase them up front or accepting the loan and promissory note from the company. I'm the only one that went 50/50. I had thought i was being clever and getting the options first (highest risk in first 2 years) and the RSUs second, but it turns out that even though i had a vesting schedule like that it was valid because the board would have had to vote on something like that. It's almost moot at this point though.

Eridrus 12y ago

Early exercise still seems like a better option than waiting if there is a positive exit event since you get to pay capital gains rates, rather than income tax rates if you hold it for more than a year. It certainly depends on how much risk you're willing to take on though.

atishd 12y ago

Here are a couple of must-reads if you have received ISO, NSO, RSUs: https://equityzen.com/blog/understanding-rsus-like-your-boss/ https://equityzen.com/blog/understanding-rsus-like-your-boss... https://equityzen.com/blog/understanding-equity-compensation-for-startup-employees/ https://equityzen.com/blog/understanding-equity-compensation... Disclaimer: I'm with EquityZen. EquityZen helps employees get liquidity for some of their options/shares before the company exits, so not only can they afford the exercise, but also finance life events.

grellas 12y ago

A few technical points: 1. U.S. tax law requires that incentive stock options (ISOs) have a 90-day termination tail on them - that is, the options do not qualify as ISOs if they are not issued under an enforceable agreement by which all vested options must be exercised within 90 days of termination of employment or expire. 2. As a direct result of point 1, the near-universal practice that startups use when issuing stock options is to require employees to sign documentation by which they agree that they lose even their vested options if they do not exercise them within 90 days of their termination date. 3. The original idea behind ISOs (the reason for distinguishing them from "non-statutory" or "non-qualified" options) is that they can be exercised at any time after they vest without triggering ordinary income tax for the exercising employee at the time of exercise (subject to certain monetary limits). 4. However, the "benefit" note in item 3 above, though a very real benefit in days gone by, is often illusory today because the exercise of ISOs requires that the amount of the spread (difference between exercise price and fair market value of the stock at the time of exercise) be included as an item of AMT - meaning that a so-called "ISO" exercise can result in a huge AMT tax. What this means is that an employee holding vested options in a startup whose value has risen greatly faces a dilemma. "Do I exercise now, pay a huge tax, hold only a piece of paper that may or may not be worth anything down the road, and hope that the stock price holds? Or do I wait until a liquidation event, exercise at that time, and thus eliminate the large tax risk of exercising before that time?" 5. Of course, many such employees chose to wait. If you cannot sell your stock right away, it is a very high risk to pay a massive tax on an option exercise only to wind up holding illiquid stock that may become valueless if things don't go right. This is no small issue. People committed suicide during the dot-bust era a decade or so ago after having made the wrong decision. 6. The problem is exacerbated by the 90-day expiration rule on employee termination. It is one thing to wait and wait until the liquidation event. But what if it is a long time in coming? Many employees are trapped in their employment when they face the above dilemma because leaving their employment will force them to exercise or lose potentially valuable options if they don't exercise within 90 days of termination. Even worse, if their employment is terminated by the company, they are put in the horrible position of losing something they worked very hard for because of a seemingly arbitrary and stupid rule saying that the options expire within 90 days of termination. 7. Well, guess what, the rule is stupid and arbitrary in many ways. Why? Because, though the law requires that it be made part of any ISO grant, this does not mean that the startup cannot modify the agreement for the benefit of the employee to eliminate the 90-day expiration provision and to give the employee room to exercise for an extended period. What happens when the company does this in spite of the tax rules? Well, it means that the option loses its character as an ISO. But it does not lose its character as a legally enforceable stock option. It just means that it is taxed as an NQO (non-qualified option). So, in a worst case, the employee exercising an NQO gets immediately taxed on the spread at the time of exercise. But, if that modification gives the employee the flexibility to carry the options unexercised but exercisable for a period going well beyond the 90-day period currently defining expiration of such options, the employee can leave employment, hold the options, and wait for such extended period (e.g., the 7 years discussed in the article here) before deciding whether to take the tax risk of exercising and holding illiquid shares. And, if, in the interim, the company does have a liquidation event, then the employee's dilemma vanishes and he can exercise and sell right away in order to make the profit and pay the associated taxes. 8. The net result of the startup's agreeing to eliminate the 90-day provision is that employees need no longer feel trapped in their employment once their options have vested when the stock price becomes high. They can leave and still keep the option of cashing in on their hard-earned options. 9. So why don't most companies agree to such modifications? Their lawyers will tell you that the law requires the 90-day rule and this is true but misleading because that requirement can be violated in a lawful way that simply changes the character of the options. Thus, if the parties can live with the change, why not do it routinely? Well, I leave it to everyone to draw his own conclusions. Perhaps startups want to keep their employees trapped. Perhaps they are just listening to lawyers who insist on following the rules. Or perhaps a board of directors does not feel it consistent with fiduciary duties to give employees something that appears to be a gratuitous modification that does not benefit the company. Whatever the reason, it remains true that most startups choose to leave their employees trapped in this dilemma without even giving them a good explanation beyond the fact they agreed to the condition and that the the tax laws "require" it. In any case, kudos to Pinterest for doing the decent thing here. It is indeed all too rare to see something like this and they are to be congratulated for it.

JonFish85 12y ago

One thing I don't see addressed is what this means regarding dilution and such. With something like this, is the company more likely to dilute its stock to try to dilute out people who have long since left the company? If Joe Schmoe leaves the company with, say, .05% of the company, and in 7 years those shares would be worth $25m or something, wouldn't the company want to dilute that person out in order to give their current employees value? I guess I don't really see what the big deal is on this. It would seem to me that the company would aggressively issue more stock to ensure that anyone who left the company 7 years ago couldn't possibly control more stock than current employees.

dlubarov 12y ago
As long as the board doesn't do anything really shady, dilution generally affects all shareholders equally. (Well, the effect can be slightly different for preferred stock holders, but at least former employees will generally be in the same boat as founders and current employees.)
- deleted 12y ago
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throwaway3010 12y ago

I brought this up recently in a negotiation and the response was that 5-10 year exercise timelines would hinder an acquisition. Makes no sense to me, but is this a real possibility?

vinceyuan 12y ago

Wow! Pinterest is so generous! In my previous company, I had to exercise my options in 3 months after leaving. Now that stock's price increased by 50%.

luckydude 12y ago

We've been trying to figure out how to do this, does anyone have the legal language that says how this works?

pcarolan 12y ago

Way to set a good example.

downandout 12y ago

This ties into the whole issue with bloated valuations [1]. VC's are paying for preferred shares and other deal points that make all classes of shares appear to outsiders to be vastly more valuable than they are. Employees then wind up paying inflated taxes on value that doesn't actually exist. The valuations are mostly made up, but the taxes are very real. [1] http://www.bloomberg.com/news/articles/2015-03-17/the-fuzzy-insane-math-that-s-creating-so-many-billion-dollar-tech-companies http://www.bloomberg.com/news/articles/2015-03-17/the-fuzzy-...

dlubarov 12y ago
But taxes are normally paid based on the latest 409a valuation, which can be way below the preferred stock value from the latest funding round. My impression is that companies rarely sell common stock to investors for that reason (among others). Since investors valued the preferred stock, common stock holders can ignore their massive valuation for tax purposes, and use the 409a.
- downandout 12y ago
  Still, an appraiser brought in to do a 409a valuation wouldn't be doing their job if they completely ignored the valuation from the latest funding round. The value will be lower by a subjective amount determined by the appraiser, but is still likely to be somewhat inflated if the preferred rounds were also inflated.

cbhl 12y ago

Why is this better than Pinterest covering the tax bill for employees that leave and/or are terminated? Is the latter impossible or impractical for some reason?

throwaway85 12y ago

Love this move. I, like many here, am feeling this squeeze after being terminated from a startup in the 1B club. I need to decide to exercise or not. I don't have the cash for the taxes. Does anyone who has found buyers for their private stock without the company's blessing care to post about their experience? Any recommendations for brokers or investment groups that engage in such transactions but aren't predatory? What snags did you run into and how long did the process take?

mavelikara 12y ago
http://www.esofund.com/ http://www.esofund.com/