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.
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.
Then 2020 happened and startups are going public at a rate not seen since the dot com days.
Whenever an article like this is posted HN seems to immediately raise this issue about how startup equity is just a lottery ticket when the probability of it paying off is clearly so much higher especially at a time when so many startups this year and next are going public at $10B plus valuations.
If there was a time to have options at a growing, revenue generating startup it’s today.
I'm not sure I agree. How many tech IPOs have there been this year? 20 or 30? Of those 20 or 30 companies, how many of their peers at founding (~2010-2013) have survived?
If I take knowledge of 2020, go back in time, and take a job, it seems like a great deal. If I'm back in 2010 or 2011, and take only knowledge of the world at that time, would I have chosen AirBNB? I'm not sure.
Even if I did, what are the odds I could/would stick around long enough to make it to the IPO -- or was willing to exercise illiquid stock at departure with years to go before the stock can be sold?
To make it fair, one should of course also consider companies which did not IPO but had good acquisitions. I'm not sure what that number is, 300? 3000? Still, across a field of 20,000 or more startups it is unclear how I'd get to this smaller set.
I think there are def things that can increase the odds, but I dont think it is fair to look backwards using 2020 knowledge.
Worse, you’re penalized the longer you stay at a company pre-IPO if you ever want to leave. If you do decide to exercise your shares, you not only have to pay the cost of exercise, but you also have to pay taxes on the difference in strike price and presumed current market value. Despite there being no actual market, the high possibility that there will never be a market, and that “current value” may reflect extremely favorable investment terms not available on the open market.
If your strike price is $1/share, you have 100,000 shares, and the last funding round closed at $20/share, you have to pay $100,000 to exercise and pay taxes on $2,000,000 that you’re still highly likely to never actually have the opportunity to turn into real dollars through a stock sale.
The longer you stick around, the more you’re incentivized to stay waiting around for a liquidity event at a job you’ve outgrown and potentially hate at this point. While the company itself has incentives to delay IPO as long as possible, knowing full well that they’ll lose a sizable amount of their burnt-out senior talent within months of going public.
Add to this the possibility of a "reverse stock split". My friend's old company wiped him and many of his colleagues out just prior to being acquired by Google.
I didn’t say everyone is going get rich joining a startup. But there’s a dozen startups from Airbnb to DoorDash to Roblox to Affirm to Coinbase to Robinhood that IPO’d this year or will next where early employees who had strike prices in the pennies or dollars will become very wealthy.
And that’s always been the case. The point is that joining any of those companies once they are notable and large means your strike and equity offering will be sufficiently small as to render it a nice consolation prize and probably (hopefully?) make up for the years you weren’t earning equity at a higher-paying public firm.
Yes, there are always people winning the startup lottery. That has never changed and nobody has ever claimed winning at it is impossible. No, there are not many of them and now is no better a time than any other.
Well funded private startups have competed with the FAANG on compensation for years. They in fact overcompensate to make up for lack of liquidity and inherent risk you take. Those employees who took the Airbnb offer are doing way better than if they took an equivalent role at a Google or Facebook.
The point is the term “lottery” is like a 1 in a million chance or more. Startup options are not a 1 in a million random scratch off ticket. You make an informed decision about a company when you decide to join just like a VC would. It isn’t like you’re picking a company to work for at random.
> You make an informed decision about a company when you decide to join just like a VC would.
Firstly, almost no startup I've seen lets me look at the cap table or board minutes, much less finances. So you get a very limited view as an employee or potential employee.
Secondly, even suppose you had the same knowledge as a VC -- the VC is making a portfolio bet that 1 of their 20 companies will hit it big. You get one lottery ticket, not a portfolio, so the risk/reward is totally different.
I trust you are smart enough to be well aware of the kind of bias you are bringing to the table with this judgement, in addition to some plain inaccuracies (actual startups - not AirBnB years deep into its lifecycle where the equity being doled out is not going to make you rich in an exit) regarding compensation vs giants like any FAANG.
I am glad you are excited about working at startups. There are a lot of people on here with a LOT of working experience who have seen this game play out over and over and are not dazzled by a handful of giants making it out anymore.
Yes, it’s probably better odds than the literal lottery. That does not say a lot. Anyhow, I’m happy you’re excited and am not going to convince you - clearly. Enjoy your weekend dude.
I guess I “won” the lottery working for one of the companies going public but all of these names have been highly visibly for nearly the whole past decade and an option anyone could have considered over a big corporate job.
If you have known about this company for 10 years and gotten in late your lottery ticket will look like you matched 4 numbers out of 6 with a few extra thousand. But you also took less money over that time so the amount drops.
If you got in before anyone heard of the company it could be a true lottery ticket.
What companies do you know that have been around for 10 years that someone should join today to get the next lottery ticket?
Go to levels.fyi and retroactively give yourself an SDE2 / SDE3 job for the years you worked at the startup, then compare that to the payout someone would have had from working at AirBNB for the last few years. Even if you assume you liquidated all the RSUs as they vested, it's tough to say that the cushy, low-stress $300k+/year FAANG job would've been a bad choice.
> You make an informed decision about a company when you decide to join just like a VC would.
Do you know how much more information a VC gets before it closes a deal vs yet another employee? Do you get to see their books before you get hired? likely no. Likely not even once you are an employee. This is kept very far away from you.
The actually promising startups don't have problems finding people. From what I've heard, it used to be way harder to get into Google in the early days compared to now. So most people only have a choice among a bunch of non-promising startups.
And for every one you've heard of, there are IPOs you've not heard of, acquisitions, etc.
You might not get rich, but there are plenty of folks out there who have made a few hundred thousand in a small company IPO, or an extra $50k for 6 months of work, or whatever.
Basically if you're in college and reading this on HN don't listen to HN comments that discount equity or value it at zero.
Know that it's hard to value, but that isn't the same as zero. It could be worth millions, it could be worth nothing, it could be worth somewhere in between.
There are lots of angel investors in the bay area because of exits that netted them 2-5M or higher ($10-20M) as regular employees. This feedback loop is part of the reason the bay area generates so many companies.
It's a bet like anything else, try and judge what kind of people the founders are and how solid the business is. Learn about ISOs and what questions to ask/how the basics work (things like the linked article here). It's an investment - owning equity in a good company is the quickest way to get real wealth if you don't already have a lot of money.
Ignore a lot of the people that make over-confident statements about it being worthless, consider the risk, value the company and founders, decide for yourself.
---
Today Stripe seems like a good choice to get a good equity return as an employee on IPO, Roblox and Robinhood are others. It's not obvious how things will turn out, but it's not impossible to make a good guess.
> There are lots of angel investors in the bay area because of exits that netted them 2-5M or higher ($10-20M) as regular employees.
But that happened back in the day when an early employee got a good cut of the stock. VCs have been perfecting their process, especially since the early 2010s. The contracts are different now -- the founders and the VCs get pretty much all the equity now.
Look at even the biggest IPOs this year. Look at how much equity was in the employee stock pools. Not nearly as much as it used to be.
> Today Stripe seems like a good choice to get a good equity return as an employee on IPO
That's highly unlikely. The company is doing well, but a new employee will get a tiny fraction of the equity.
Stripe was founded in 2010. Robinhood in 2013. Roblox in 2004 (!). If you were an early employee at one of these companies, stayed two years, and were considering whether to buy your options, you'd have to spend a large sum of your own money (plus the taxes - oh god, the taxes!) for a potential (unlikely) payoff occurring on average a decade down the line. Additionally, given this incredibly high amount of uncertainty, would you really be motivated to work that little bit harder considering such a distant liquidity event?
Hindsight is 20/20, it's easy to pick the success stories after the fact. Can you pick the 3 companies most likely to IPO in ~2030, and would you stake money on that?
> It's a bet like anything else, try and judge what kind of people the founders are and how solid the business is. Learn about ISOs and what questions to ask/how the basics work (things like the linked article here). It's an investment - owning equity in a good company is the quickest way to get real wealth if you don't already have a lot of money.
Sure, it's the quickest way to get real wealth if you get very lucky. For most people it's a losing proposition.
There is no tax on exercise unless there’s a spread.
Companies are taking longer to IPO, that doesn’t make them a bad bet but the time horizon is longer because of all the private money available (in part from people making money via equity).
FB started in 2003 and went public in 2012. You could have joined in 2010 and your equity today would be in the seven figures.
I’d bet on stripe being similar (though I don’t know the specifics of their offer letters). I think Robinhood is a good bet too. For a smaller, less known company - I’d pick cloud kitchens.
> “ Sure, it's the quickest way to get real wealth if you get very lucky. For most people it's a losing proposition.”
People on HN can keep repeating this to feel better about themselves, but those that ignore it are the ones that’ll make seven figure (or higher) returns.
Edit: SpaceX (Starlink) are other bets I’d be happy to make.
Why wouldn't there be a spread? You're an early employee at a company; by the time you choose to exercise, the company is presumably valued at a significantly greater amount than when you joined?
> FB started in 2003 and went public in 2012. You could have joined in 2010 and your equity today would be in the seven figures.
Feel free to prove me wrong, but I have my doubts that you would receive anywhere near enough stock as a regular employee that late in the day to make it worth millions of dollars after IPO. Same with Stripe. (Note that appreciation in the value of Facebook stock between 2012 and 2020 doesn't matter at all. Anyone could have bought Facebook stock in 2012 and seen those gains).
Well if there is a spread then you have some other options (second market, third party exercise) and you already have some return. If it's valued at significantly greater than when you joined you're in a decent position.
> "Note that appreciation in the value of Facebook stock between 2012 and 2020 doesn't matter at all. Anyone could have bought Facebook stock in 2012 and seen those gains"
This isn't really true - FB is kind of an exception since it went down after IPO, but in the general case regular investors don't usually have the ability to get in at the initial price. Also later in a company's life employees are more likely to be granted RSUs instead of options. Holding RSUs is different than dumping in money on IPO day as an outsider (even exercising options gives you some buffer that makes it lower risk).
I don't know what FB's 409a was in 2010, but I've had friends at FB, Snap, AirBnB, Slack, Palantir, Tesla all do extremely well from their pre-IPO equity and none (except for Snap) were super early employees.
Yes there's risk in exercising options, you can mitigate that by choosing well. It's worth taking it seriously when evaluating comp.
I'd also argue the opportunity cost/downside risk here is not so bad either. Salaries at modern VC startups are pretty good anyway. You can make the bet and just work at your preferred megacorp if it doesn't work out.
Also - I appreciate the back and forth, the reason I push a little on this issue on HN is because I think it misleads new grads who read these comments into thinking they shouldn't value equity, I think the answer is more nuanced.
No worries, and I appreciate the back and forth as well. To be clear, I don't think that options have no value. I think that at a mature company they definitely have some value and you need to consider that. I think that as an early employee they have nonzero value, but I don't think they have a lot of value (this is where you and I mainly differ, I assume).
> Well if there is a spread then you have some other options (second market, third party exercise) and you already have some return. If it's valued at significantly greater than when you joined you're in a decent position.
IME this is true at more established private companies but not at most startups. I don't think it would be that easy at Stripe in 2012 or 2013, for instance.
> Yes there's risk in exercising options, you can mitigate that by choosing well. It's worth taking it seriously when evaluating comp.
With all due respect, I think that you may be letting hindsight get in the way of how difficult it is to pick which companies are going to be successful in 8-12 years' time. I certainly couldn't pick the Stripe, Slack or Palantir of 2030. But if you can, you are much more insightful than I am - although I think that my (limited) level of discernment may be more representative of the average person making these decisions.
> I'd also argue the opportunity cost/downside risk here is not so bad either. Salaries at modern VC startups are pretty good anyway. You can make the bet and just work at your preferred megacorp if it doesn't work out.
They're not bad, but you can easily pocket an additional $100k+/yr working at a big company, that money adds up when you invest it, and that money is guaranteed. (There are plenty of non-financial reasons to work at the startup, though, obviously.)
Also don't be afraid to insist on learning the current valuation and anticipated future valuation from stakeholders if they are trying to give you an equity grant. You have a right to know!
I heard a rumor that Stripe recently changed their initial RSU grant. Now the value is fixed, you get $x worth of stock every year. So new hires lose out on a lot of the upside from stock growth.
I don't believe that's how RSUs work at Stripe (or anywhere). On hiring, you get 5000 RSUs (or whatever the number), and after time vesting, they convert into stock. New hires gain a lot of the upside from stock growth, even with RSUs.
Even now, maybe not. Does anyone know whether most of these companies ever did share buybacks for the rank and file employees? If not, then imagine the scenario where you left somewhere between 2015 and 2019 and had 30(?) days to exercise ISOs. You might have to put in a ton of money and even more for the tax bill. Maybe more than you can afford.
I’d love to know whether this is a common story or a rare one, but I doubt that data exists publicly.
I had a company offer to arrange a purchase of some of my (non-public) stock as I was leaving. They knew of an investor that wanted to own more shares and brokered a price that was well above the most recent 409a, so I was able to exercise everything and sell off exactly enough to cover the tax consequences of my "gain." Not only did it let me exercise options to get stock without having to come up with a bunch of cash, but it gave me more confidence that I actually wanted the stock. Very cool move on the company's part, in my opinion. I have no idea how common this is.
Nowadays there are non-recourse loans available on the market for that (covering both exercise costs and taxes). Not for all startups though and mostly late stage ones.
> If there was a time to have options at a growing, revenue generating startup it’s today.
AirBnB, DoorDash, etc. have been giving RSU's, not options, for years. RSU's are still worthless without an exit, but stock options have the major problem that you can wind up with negative value, or even extremely negative value. RSU's at least have a floor of zero.
It’s becoming more common to grant 7-10 year window after certain tenure (like two years) at least among yc companies. I’ve also seen window extended per year of tenure
Most do not become wealthy or even approximate “rich.”
Most are simply made whole after years of being underpaid.
Looking at successful exits (the ones you hear about) as your indicator of the market state is lopsided and inaccurate. I have one friend who did well in an exit. I have countless other friends who have been in and out of startups that either fail, get rolled into another company with little/no cash landing in their pockets, or get acquired for a pittance.
You are looking at the Michael Jordans and Kobe Bryants and deciding that everyone can win big in basketball.
I have a very different experience. And so do many of my friends.
Again there’s always winners and losers. I didn’t say everyone is a winner. But the odds are no where near “random lottery odds” especially if you aren’t just randomly picking a company to work for and have a clue why the company could be successful.
Snap, AirBnB, Stripe, FB, Tesla (though TSLA is kind of a weird exception in lots of ways) - it isn't that hard to see which companies are rocket ships in early growth. If you can get a seat on one even as employee 500 you'll probably do pretty well.
Yes there's risk, but the odds aren't lottery odds and it does a disservice to inexperienced people that don't understand what's true to pretend this is the case.
You also get to make this bet a few times if you're good at interviewing and willing to jump around every four years or so to a new place (something I haven't done, but I've seen people do).
Professional investors struggle to make good investment decisions after years of intense practice, and many many investment decisions.
Why do you think naive employees can pick winners? Clearly the vast majority don't or can't...
The only difference is that an employee might get in on a hot deal where many investors are chasing one great looking deal and most investors will miss out.
I suspect it's because a lot of investors don't know what they're doing and are further removed from the details.
The good ones (of which there are few) have hands on experience as founders or a deep understanding of the industry and personal technical experience. Employees don't have to be naive, they're on the ground with an understanding of the technology and are likely to see first hand what works and what doesn't.
Obviously not everyone will succeed, but there's no reason employees can't do a better job than investors (and many do).
So you feel like your circle of friends is good at picking which startups will have a financially successful exit? If true, you should be a VC and not a lowly tech worker ;)
Tell them what? That if they had invested part of their huge six figure salaries into a diversity of tech stocks over the past several years they could have been actual millionaires by now instead of waiting this long for some IPO sitting on bubbly valuations that could pop in an instant?
you assume no one is putting part of their base salary and cash bonus in the stock like any other person would. of course they are. just because the equity portion of your comp is illiquid vs someone else doesn’t mean you don’t have the means to save and invest.
The comparison is being drawn between employees who joined say google, amazon, or netflix - and those who joined startups. The employees at the public company benefit in negotiations with the employer by having price transparency on the value of their equity as well as liquidity.
You could work for Facebook, but think Apple is a better bet and sell your equity every month to buy apple shares. Most startup employees overvalue their equity and accept lower total compensation compared to their public company counterparts and receive illiquid or potentially even negative value financial instruments in return.
Unlike an actual lottery ticket, the theory was that there was incentive to help the company succeed in the stock options:
From Steve Blank's article:
> Startup employees calculated that a) their hard work could change the odds [of their options being valuable] and b) someday the stock options they were vesting might make them into millionaires.
So while from an odds perspective, today's ISOs are still (perhaps) better investments than state-run lottery tickets, from an employer/employee perspective the alignment of interests is no longer there. And (as you've noted down-thread) this is resulting in employees asking for much higher salaries that essentially match what they're being offered by already public companies. In addition, employees may be more focused on the success of their careers and less on the success of their employer.
Posting anon for obvious reasons. There is no alignment of interest for most employees with stock options, and anyone that things so is being naive or foolish.
Firstly, you have no idea what the cap table looks like as an employee, so it isnt clear whether you alignment is equivalent to a grain of salt or a car or a private island. And if it werent a grain of salt, the company would be eager to tell you.
Next, founders often get partial cashouts, so their goals are different from yours. They already got their nice house in palo alto, their nice car, and a kids's college fund. Now they are swinging bats for a grand slam. You are the ball they are hitting -- most likely they strike out. You lose, they still win, just not as big.
Next, VC-installed management, friends of the board, and other insiders are already cashing out while you "wait for the big IPO." The insiders are getting nice cash bonuses. They are on incentive plans where they get $1/2 Million or more for hitting targets. Or they are 20somethings who are mysteriously senior directors or VPs earning cushy 400k salaries. You arent.
Instead, you are taking your "startup salary", a big discount over big company stock. You're working just as hard. Each year you give up big perks and big pay at big companies you could be working at. If you cant take it anymore, you lose, because you have to exercise illiquid stock and pay tax with real money. If you get bullied or have been sexually harrassed and are desperate to find another job, you still lose -- , because you have to exercise illiquid stock and pay tax with real money.
Except there are a line of suckers, often out of college, willing to take this bet. So the music plays on.
3. If you are risk loving, work at a late stage startup with some semi-liquid private market for stock
4. If you are looking for punishment, roll the dice with an early stage startup OR play the lottery
The ONLY real scenario where early stage startups make sense is if they give you a great role you cannot get at a big company, something with lots of learning or growth. That is actually a great opportunity.
At this point the fed seems trapped, maybe even permanently so - in 5 years asset prices will have been driven multiples higher on fed money and 0% interest. It would take a gargantuan amount of political will get the base rate back to even 3% - bringing down asset prices and corporate/institutional/individual borrowers with them.
“People keep saying that lotteries are ‘a tax on people who can’t do math’, but if you pay attention there are lottery winners every day. There’s no better time to play the lottery!”
Look at venture capital, since they’re the ones that invest in every one of these VC-backed funds. Most funds don’t make money and of those that do, exceedingly few beat the S&P 500.
The examples you’re giving are a tiny sliver of startups and at this point are not startups.
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.
*Doesn't apply to companies with 10-year exercise windows or other good tricks.
I agree with your overall sentiment. Most companies should have a better legal structure that benefit employees. However
> Companies will shovel money to their lawyers to set up an ownership structure that benefits the investors and founders
This isn’t entirely true. When a new startup goes to a law firm to set this up, even top tier law firms will provide a structure based on prewritten templates that the firm uses will (nearly) all their clients.
This means that setting up a company is actually relatively cheap if you use pre-written templates from your law firm. As soon as you make any special requests, it means those templates can no longer be re-used and that’s when the startup needs to shovel money having lawyers rewrite the templates to accommodate special requests / clauses.
The blame for this is always put on founders, which isn’t uncalled for. But for real industry wide change to happen, it’s the law firms that need to make it easier for their clients to offer employee-friendly structures so that founders don’t need to pay a premium for employee-friendly structures.
Also important is that the entire structure is typically set up very early in the company’s history (usually before the company has any or minimal funding). It’s difficult to justify spending $20,000 to set up a non-standard equity structure vs. $2,000 for the standard docs when the startup may only have just $100k in the bank.
Industry change won’t happen without law firms offering cost efficient ways for companies to set up employee friendly structures.
The situation is very unfortunate and unfortunately difficult to fix.
I'm curious why ISO exercises were ever added into the AMT income calculation. Exercised shares in private companies are generally very illiquid, and exercised shares in public companies would get taxed on sale, just like any other stock. On the surface, it just seems like a rule that doesn't make sense at all, but likely would never get changed due to the optics of it.
my understanding of US stock options for Canadians (and really for anyone who can't afford to exercise their options) is:
- having ISOs is bad, you don't get any of the tax advantages that Americans get and it means that they expire 90 days after you leave the company if you don't exercise them
- having NSOs that expire after 10 years is good, they can still be risky to exercise (same as with ISOs), but that's not too bad because you can delay exercising for 10 years after you get them, and hopefully they'll become liquid (or worthless) before then
- it's possible for a company to switch employees' options from ISOs to NSOs (for example Pinterest did this https://fortune.com/2015/03/23/pinterest-employee-taxes/), so it might be worth putting pressure on your employer to offer that change if you're in the bad (ISO) situation
It's reassuring that you've independently come to the same conclusion I did.
And in the absence of the NSO option, my current thought on the matter is that they hold no value unless there's an exit while I'm working there, and I'll want to get an accountant who knows how to exercise it all properly.
We should talk about this. I'm working with 3 other people who are all in the same boat. So far it seems like the only way to really make it work is to get options with a 10 year exercise window, or basically consider them worthless until the company has liquidity.
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.
HR almost never knows, because they themselves have no idea what the options are or are worth, and indeed are a majority of the time, worthless anyway.
While I totally understand the frustration with taxes, vesting rules, etc. the entire problem, IMO, comes from the lack of liquidity in these shares.
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.
I think that if we are expected to pay taxes there needs to be an immediate market to sell those shares at the taxable price. Would the IRS take the shares to pay the taxes? If not they shouldn’t be considered taxable until there is an exit.
Standard Disclaimer: This is from my own personal experience. YMMV.
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.
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.
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).
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].
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:
> 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.
For the youngsters reading this thread, please understand there is a big difference in the expected return of early and late stage startups.
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.
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).
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.
You may find pre-ipo companies (Robinhood, Instacart, Coursera) hit that sweet spot of comp and job satisfaction.
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)
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?
It depends on your options, but most likely there are no tax loopholes to take advantage of -- in most cases they are taxed like regular income and treated as deferred income for tax purposes.
That being said, if their value is over $1MM, a lot of financial advisors will gladly review your stock agreements and give you a free consultation. They do this because they hope you will sign up for their services after you become rich.
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?
Can the option part of ISO be written in such a way that you can decline the option 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?
The "AMT trap" occurs when you exercise and is calculated based on (options exercised)*(FMV - strike price). By not exercising, or exercising a small amount, you will not be subject to AMT.
However, I completely agree with your sentiment that knowingly granting vanilla ISOs to early employees which require any double digit percentage of salary to exercise as they vest is quite cruel, especially those that do not understand the dynamics of the "AMT trap".
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?
It is easier said. At the time of vesting probably you would know that the startup is doing well, it is gaining customers, and revenue figures look good. But you might not know if the startup is breaking-even, if so how profitable and even it is profitable, is the FMV high or low. If FMV seems tad higher, does your investment and tax incidence on it gives a better return than investment elsewhere (say index funds, stock markets, fixed deposits etc.). Add to it the uncertainty that some unforeseen risk/event could still cause the startup to falter.
It's pretty straight forward for public companies. You can map the value directly to stock and when you vest it's treated exactly like standard income, and you can (and generally should) sell. If you choose not to sell, you have the same tax rules that apply if you had just bought shares the day you vested.
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.