3 ms·

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 com

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.
    - beagle3 12y ago
      If the exercise event and the liquidity event are not in the same year though, you might not have enough cash to pay the taxes. And if the liquidity event is postponed forever (e.g., market crashes like it did in 2001 and 2008), you're stuck with a big tax bill and no way to pay for it.
joelgrus 12y ago
Yeah, I left a startup last year and exercised my options on the way out. The check I had to write for the strike prices was a lot bigger than the AMT hit. (Which is not to say that that's always the case, but it definitely was for me.)

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.
  - beagle3 12y ago
    If the exercise event and the liquidity event are not in the same year though, you might not have enough cash to pay the taxes. And if the liquidity event is postponed forever (e.g., market crashes like it did in 2001 and 2008), you're stuck with a big tax bill and no way to pay for it.

joelgrus 12y ago

Yeah, I left a startup last year and exercised my options on the way out. The check I had to write for the strike prices was a lot bigger than the AMT hit. (Which is not to say that that's always the case, but it definitely was for me.)