4 ms·
The article doesn't state this well, but the additional cost comes from AMT. If you exercise your options you pay AMT on the face value of a share of common sto
by sulam 11y ago
The article doesn't state this well, but the additional cost comes from AMT. If you exercise your options you pay AMT on the face value of a share of common stock at time of exercise minus the exercise price (the spread). This is true regardless of whether or not those options are liquid at the time. For a unicorn, the stock has most certainly increased in value over time, which means the exercise price is a fraction (possibly a very low fraction) of the current value, and you'll be writing the IRS a much larger check than you write the company.
The only escape from this problem is an 83(b) election, which I've heard many companies say they don't allow (IANAL and am not sure what the circumstances are here). It's also the case that with an 83(b) election you are putting real money, potentially a significant amount of real money, into the company's bank account with no expectation of when that investment will become liquid. So this also has risks, but at least the AMT is on the spread, which is $0 in this case.
- 7Figures2Commas 11y agoVirtually nobody talks about the AMT credit when discussing ISOs and the AMT trap. Everybody assumes that AMT is this horrible beast, and while it's never a good thing, folks would do very well to have an experienced professional look at their unique situation and perform the calculations because it's often not nearly as bad as suggested.
- sulam 11y agoI have a 7 figure AMT credit that will likely never be eliminated in my lifetime. People in this position hopefully all have competent tax attorneys who understand the credit. The reality is that the credit isn't very meaningful to people like me (and I am pretty typical among people who work at Unicorns).
- mahyarm 11y agoIf you make a salary income around $150k/yr in California, your AMT credit no matter how large is going to be a few hundred dollars per year. AMT credit is worthless unless your salary income is around $300k+. AMT should not apply until you actually liquidate capital gains, but good luck getting that kind of thing passed or addressed.