This article advises employees to exercise their shares as soon as they are vested as long as they're bullish on the company. I know several people who've been fucked over doing this. The thing you need to remember is, your private-company common shares grant basically no enforceable rights.
My point was a tax point not a "rights" point -- if you exercise (and are bullish and can afford to), then you have the advantage of getting the long term capital gains timer going which can be hugely advantageous.
Stated differently, I've much more people screwed by the inverse case -- they DON'T exercise, the leave the company, they have 90 days to exercise vested shares or lose the options, the fair market value has crept up, and they end up with a huge AMT tax hit to keep the stock they worked for.
simple scenario: when you join your company gives you 1000 options valued at $1 per share (at the time of issuing), vesting in 4 years.
Assuming after 2 years, you decide you want to exercise the options that are vested, so you pay your company $500 to get your 500 shares.
Company start going down the tube, and folds out, or is selled at fire price. You end up with basically worthless paper on your hands. So, instead of earning money, you lost.
Imagine, that instead of $500 that was 5000, 50000. It is a lot of money.
There are also tax implication, depending what kind of taxing schedule you choose. You can find yourself actually paying taxes, for those shares at the time of excercising, yet when you want to sell, they are worthless.
Double ouch.
Also, one thing to consider is that when you exercise options, you have buy those shares. If your company is iliquid (not gone ipo), it might take a long time when (if) you are able to sale them (either it goes IPO, or the company is sold). So, you are tying a chunk of your money, in these shares.
So, as always, buyer beware. Do your own math when it comes in cases like this.
I figured this was obvious-- if the company fails, you lose the money invested. That's the nature of equity and stocks in general.
I wouldn't consider losing 5k after exercising options (and knowing the obvious risks) as being "fucked," though. Just a bad outcome. And exercising 50k worth of options on a company that has a chance of failing is just stupid.
> I wouldn't consider losing 5k after exercising options (and knowing the obvious risks) as being "fucked," though
Except it comes at the same time the company folds, which mean you lose your job and have to pay for the privilege. I agree on a hypothetical 120k salary this isn't a big deal but in many start-ups you're basically at subsistence level.
Put aside the company failing, which is an obvious risk that you already knew about.
Assume the company does moderately well, and is sold at a premium.
There is nothing that practicably prevents the company from diluting shares at that point and distributing the new shares among current employees, to the disfavor of everyone who left.
In fact, that seems to happen regularly. Companies get sold, and non-employee non-VC stockholders get nothing because of how the deal is structured.
