Using a throwaway for obv. reasons. I'm employee lower thirties in a company that recently went public with a similar valuation. Unlike gp, I am still with this company, and really like it there.
Ignoring taxes, vested comes in at about 1 mill. I'll pay about half that in taxes. I have a few hundred k in unvested from subsequent awards.
I've hit the start up lotto, but I will not likely pocket 7 figures from equity for a long while, assuming continual equity awards. Well, if the stock does really well, I could pocket 1M, but it needs to go up quite a bit. Honestly, I would likely have made more over these many years in aggregate at a FAANG. But I've enjoyed myself and still look forward to work every day.
I'm blessed and lucky. But the startup lotto is not as good as you might think. Never count equity in a start up. Go for the salary.
Basically, if you are given stock options with a strike price of $small, and then the company has a liquidity event and you exercise your options when the shares are at $large, your AMT taxable income increases by $(large - small), and you'll owe taxes on it for the current year (at AMT rates), regardless of whether you sold (or were able to sell) any shares. This is in addition to the short or long term capital gains that you'll eventually owe after you actually sell shares.
Apparently some people went bankrupt after the first dot-com bust because they owed absurd amounts of money in taxes but weren't able to sell any of their shares (e.g. due to employee lockup) until after their company's stock tanked.
If this happens and you are able to afford the taxes, there's a mechanism to carry your losses forward and get AMT credits in future years, but the rules are hilariously complicated, and you either won't get credit for anywhere near what you paid initially, or you'll end up getting a tiny tiny fraction back for the next hundred years.
It kind of sucks. There's been talk of fixing this for a long time, but I don't think it's ever gotten anywhere.
You usually are awarded stock options. A paper that gives you the right to buy stocks for a specific price. Those options (like most things employers will give you) are seen as income, because the employer give it to you as a reward for your work (just like salary).
So usually, when your company exits, that's when you then "exercise" your options (aka actually buy the stocks the options allow you to buy) and then sell those stocks.
Then:
- Exercising the options triggers income taxes on the value of the stock you are getting (minus what you pay for it)
- Selling the stock triggers capital gain (short term if you sell before 1 year, long term after holding them for 1 year)
A simple example:
- You join and receive 100 stock options at $1. That means you can buy 100 stocks for $100 total.
- Your company IPOs at $5 per stock.
- You decide it's time to sell. You "exercise" your options -> so you spend $100 to buy 100 stocks at $1. Those stocks are worth $5 each, so you receive $500 in value. -> You get taxed on $400 of income (just like salary, bonus, etc).
- You sell your stocks for $500 instantly. You get taxes short term capital gain on $500.
So you had in mind you'd make $500 (yayyy we IPO at $5 and I have 100 stocks) but you actually end up with ~$200 in your pocket.
This is if you exercise at/after the IPO. If you can afford it, you can exercise early, get taxed on that earlier value, and then it will be mostly capital gains. Higher risk, cause it could end up being worth nil, but higher reward.
yes, there are a lot of other situations, but this is the general one and I was explaining the situation where why the person would not be paying capital gain tax
Ignoring taxes, vested comes in at about 1 mill. I'll pay about half that in taxes. I have a few hundred k in unvested from subsequent awards.
I've hit the start up lotto, but I will not likely pocket 7 figures from equity for a long while, assuming continual equity awards. Well, if the stock does really well, I could pocket 1M, but it needs to go up quite a bit. Honestly, I would likely have made more over these many years in aggregate at a FAANG. But I've enjoyed myself and still look forward to work every day.
I'm blessed and lucky. But the startup lotto is not as good as you might think. Never count equity in a start up. Go for the salary.