Fun situation I found myself in a couple of years back: My options were expiring for a company I had worked for (3 year expiration after I left) and the secondary market was not great. I was able to make a sale well above my strike price but below the most recent 409(a) valuation. I arranged a deal where I exercised and sold the shares in the same day, with the buyer fronting the money to exercise as part of the transaction.<p>In this case despite the fact that I sold the shares on the same day for less than the 409(a) valuation, that valuation is still used to determine taxes owed for exercising. And that spread is taxed as income, whereas the subsequent "loss" on the sale (since the cost basis for the stock was then the 409(a) valuation and I sold lower than that) is a capital loss, and so they do not cancel each other out. Luckily in my case my sale price was just a little below the 409(a) valuation so I didn't get hit too hard but still, it felt absurd.
"For most startup employee’s startup stock options are now a bad deal."<p>"Startup Stock Options – Why A Good Deal Has Gone Bad"<p><a href="https://steveblank.com/2019/04/10/startup-stock-options-why-a-good-deal-has-gone-bad/" rel="nofollow">https://steveblank.com/2019/04/10/startup-stock-options-why-...</a>
Companies will shovel money to their lawyers to set up an ownership structure that benefits the investors and founders, but don't bother to develop a workaround to the AMT exercise trap, and that tells you everything you need to know about working at a pre-RSU startup.<p>*Doesn't apply to companies with 10-year exercise windows or other good tricks.
What I need is "A Canadian (or non American) Remote Worker Engineer's guide to U.S. Stock Options."<p>At the moment they feel entirely valueless.
Isn't it great when you get an offer from a startup and they say you will get 5000 option shares but they can't tell you literally anything about what they could possibly mean for you in the future? Like even how many shares are outstanding or what the current and expected valuation might be. I've had that experience a few times.
While I totally understand the frustration with taxes, vesting rules, etc. the entire problem, IMO, comes from the lack of liquidity in these shares.<p>These are "realized" gains to the IRS, but unrealizable to the employee because there's no way to sell the shares. That leads to large tax bills only payable in cash, which you can't get by selling the shares.<p>There are solutions to provide this liquidity in the works: <a href="https://www.google.com/amp/s/amp.ft.com/content/d52b0487-b13c-4bae-bf27-770518ff083d" rel="nofollow">https://www.google.com/amp/s/amp.ft.com/content/d52b0487-b13...</a><p>As soon as these are real, most issues with stock option compensation go away.
Standard Disclaimer: This is from my own personal experience. YMMV.<p>This looks like the same type of Gold Rush that happened 20 years ago in the dot.com boom/bust. Same advice I learned the hard way applies today as I wish I'd learned it then - "when there's a gold rush, go sell shovels." Or in this case, as a technologist, sell topographical survey info you've collected, gold panning tutorials, fully outfitted claim excursions (you get the idea) - ANY knowledge you have about HOW to do what people THINK they need to do to find gold. Don't take equity, take cash today. It doesn't matter if they get rich or not, YOU make sure you get paid FIRST and be clear that if they don't want to pay for your services, their competitors certainly will.<p>To continue to abuse the analogy, to the business person we technologists are now and have always been "resources" to be used as a means to an end. You think they want to give their "pack mules and shovels" a cut of the gold? Unless you have some business domain knowledge, you'll never get an equal seat at the table. 9 times out of 10, if you DO have some business knowledge, you can probably make more money by going off to become a direct competitor. Or, better yet, gain some knowledge of the field and work with a competitor who has a better vision.<p>I've been inside 4 start-ups in various stages, and one post-IPO company that included stock options over the past 20 years. Only the dot.com era company ever amounted to anything, and that was dumb luck WRT having an IPO when people would force money on you for doing eAnything(TM).<p>I follow one primary rule when taking a job: you're either there to earn, or you're there to learn. It you're humble enough and not an idiot, you realize that there's a number of things to "learn" at any point in your career between different industries, different career paths, and different levels of position. If you think you're "too good" to do some job, you may be right but you may also just be an asshole.
Since this post in 2013, the major change in the US is the addition of 83(i) [1].<p>At least that way, folks who believe the stock will be liquid within 5 years, but don’t want to wait can exercise, defer taxes, change jobs and see how it goes. As the article says though:<p>> And, as in any option exercise, paying the exercise price itself is an investment risk and having a tax-deferred exercise does not make the exercise risk-free.<p>[1] <a href="http://stockoptioncounsel.com/blog/tax-deferred-option-exercises-under-the-new-section-83i-tax-cuts-and-jobs-act-of-2017" rel="nofollow">http://stockoptioncounsel.com/blog/tax-deferred-option-exerc...</a>
YCombinator probably has the actual data on the final value of shares across all employees for their IPOed companies...<p>It would be fantastic if YCombinator could run the numbers: I suspect the median payout would be very low!
For the youngsters reading this thread, please understand there is a big difference in the expected return of early and late stage startups.<p>Early stage startups are often a crap shoot financially as others have pointed out, and contracts are structured so that unless you're a founding member, even a successful exit (after 10 years avg) probably won't net you FAANG money.<p>You will however probably have greater job satisfaction having more ownership over the product and will gain a much greater breadth of experience, which are the main reasons people leave FAANGs for startups (yes that is quite common).<p>Late stage startups (companies that are still primarily VC backed) but have a high likelihood of a successful exit have a financial risk-reward that is much closer to FAANG. The upside is that they are not so massive that your job will mean more than just ladder climbing and working on menial projects that have zero business impact.<p>You may find pre-ipo companies (Robinhood, Instacart, Coursera) hit that sweet spot of comp and job satisfaction.<p>Also if SPACs continue to get more popular, there's another option for the mid-stage startups.
I wonder if anyone here can offer any good financial advice for people whose company recently went or is about to go IPO in this market? (and who hold a significant chunk of vested equity now)<p>Are there tax strategies to consider? Selling / holding strategies? Should one consult a tax advisor for a few sessions to learn about any specific issues to take into account in holding, selling, planning, and taxes?<p>Thanks!
Suppose you have stocks options and then you leave the company and face an AMT trap. This can be very very bad. Crushingly bad. Why would a company knowingly subject their employees to this possibility?<p>Can the <i>option</i> part of ISO be written in such a way that you can <i>decline the option</i> if it is financially disadvantageous to exercise it? Is it enough for the company to grant a long exercise window, say five years along with a decline option?
All issues with stock options aside, if you are confident in an exit isn't it better to exercise as they vest in order to minimize the income tax you'll pay during a liquidity event?
Discussed at the time: <a href="https://news.ycombinator.com/item?id=6882744" rel="nofollow">https://news.ycombinator.com/item?id=6882744</a>