(This only applies to US taxpayers) I have a friend who had to walk away from life-changing money because he couldn’t pay the tax bill. When you leave a startup and exercise your grant, the IRS will look at the difference between the value of your grant and the current value of the stock and tax you on the difference.<p>For example, let’s say:<p>- You just joined company Contoso after their series A round<p>- they gave you 15,000 ISOs (Incentive Stock Options) @ $0.25/share<p>Fast-forward to 4 years later. The company is still private, but doing well with each share valued at $10.<p>If you want to acquire some shares then, you will have to pay 15,000 * 0.25 = $3750 to acquire the shares. HOWEVER, given that the new share price is 40x the old one, the IRS will consider that you owe taxes on your paper gain of $146,250. This can be a huge issue for early employees!<p>There’s a way out of this though – you can often early exercise your grant, pay out the full amount (in our case $3750) and tell the IRS that you choose to exercise your shares early. You do this by sending them a form to tell them you’re doing an 83(b) election.<p>I know it’s a bit of tedious googling and paperwork but if you work at a startup that does really well, that could make the difference between life-changing money and walking out with nothing.<p>If you have any questions, feel free to shoot me an email – my address is in my profile
Wow... so you have to pay tax on money you actually don't have in your wallet yet? This would be a bit of bonkers since, in fact, you may never get to the point when you get real money from your shares... Can US citizens do anything to pay when they actually get money on their bank account (i.e. when they liquidate their shares) and not before?
That's a good heads up, thanks! Additionally, If I recall correctly, there was a 30 days deadline involved. So, time is of the essence. (disclosure, I'm NOT a legal expert)