I'm planning on exercising some of mine (in the post-resignation 90 day period) via EquityBee. I don't want to lower my own cash reserves now due to a looming recession, but do believe the company has upside. EquityBee (and a few other companies, like vested, all of whom I think are legitimate) gives me money to exercise the options in exchange for ~30% of the shares should the company go public, plus repayment of the original loan. It's a win-win for me. The worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT.
> worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT
I don’t have the details to be able to say anything useful. But there might be a narrow window of tax circumstances in which 70% of the equity without AMT but with loan costs is better than 100% with AMT + marginal long-term taxes and no loan costs. (Such schemes make sense if you’re concerned about not being able to exercise your options on short notice after getting laid off. If you have the liquidity, however, set it aside, take the yield and hold form after talking to a CPA.)
In this case you would likely owe income tax on the amount EquityBee lent you to exercise the options. Non-recourse loans that are forgiven are considered income by the IRS.
Yes, but you get the benefit of .7x exercising with the cost of never exercising.
Exercise, no successful IPO: lose $x exercise cost
Exercise, successful IPO: lose $x exercise cost, gain $y share sale benefit
No exercise, no successful IPO: gain/lose nothing
No exercise, successful IPO: gain/lose nothing
Service exercise, no successful IPO: lose nothing, maybe gain some AMT credits or capital loss carryovers
Service exercise, successful IPO: lose $x exercise cost plus interest, gain 0.7*$y share sale benefit
Your best best case is exercising yourself and getting the IPO, but you have to weigh that against the likelihood of it occurring and your personal risk tolerance for the $x cost to exercise.
I would never buy a lottery ticket, but I will always accept even .01% of a free lottery ticket.
> The worst outcome is I make no money; the best is that I keep 70% of my shares without paying for them. They even pay AMT.
I'm not 100% sure about this, but IIRC these programs are typically structured as a tax-free loan to you. If the shares end up worthless, the loan is then forgiven.
So while you may not be out the principle of the loan, or the AMT, the forgiven loan may be taxed as income at some point in the future.
Is amt really an issue if you’re high income swe? (especially if double high income). Seems like since trump’s “tax cuts” your normal rate will always be higher than (base + options * strike price)*.28 unless you really get a ton of options and there’s huge fmv growth.
It’s not options * strike price, it’s options * (fair market value - strike price), which is usually 0 at issue and is $$$ if you exercise and sell after an IPO (or after subsequent funding rounds/revenue growth which bumps up FMV).
EquityBee looks really interesting, but your startup has to have raised over $50M to participate. Does anyone recommend any alternatives for companies in the range of $25M-$50M raised and ~$200M valuation?
Yes. They covered mine at 100% of the max AMT. So basically that's option count * (FMV - strike) * 0.28, which is the max I can pay. I pocket the difference, but of course I have to pay it back should the company have a liquidation event
