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Handcuffed to Uber

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Re: Handcuffed to Uber

#201

Post by phamilton »

limeyx wrote: post #197
phamilton wrote: post #164

Earlier quoted context omitted.

> Provided you don't hit AMT I think people downplay how easy it is to hit AMT. A single, no dependents, standard deduction filer making $120k will hit AMT after $26k of on paper gain for ISO exercise. Everything after that will be taxable. Filing jointly, 2 people who each earn $120k can absorb $18k in on paper gains from exercising ISOs. Add in a kid and it drops to $15k. That's a paltry sum, basically breaking any…

Yes but I believe you can (eventually) get the AMT difference back in offsets assuming there are later years when you are below the AMT limit. Fiendishly complicated and increasingly dumb though ...

That's assuming you can come up with the cash in a timely manner to pay the tax bill and your illiquid asset holds its value.

It's a rough situation and something needs to change.

Re: Handcuffed to Uber

#202

Post by brianmcconnell »

redshirtrob wrote: post #117
brianmcconnell wrote: post #66

I am currently dealing with this issue, though on a smaller scale. The moral of the story is to forward exercise options if you can. Basically what this means is you pay to exercise on your start date. If you quit or get pink slipped before the standard one year cliff, the company does a buyback. Otherwise, the shares vest as per your vesting schedule. You can potentially avoid a lot of the AMT nastiness this way, an…

Be careful, the company may not be required to buyback the shares. The company may have the option to accelerate the vesting schedule on the options. It's best to assume they'll choose to do this only when it's optimal for them, which likely means when it's suboptimal for you.

It's a real dilemma, as the company is doing well enough that the 409a value is not trivial, but its not clear that they will have a liquidity event in the near term. So on one hand I don't want to get screwed on a fictional profit on taxes, but on the other I don't want to forfeit the options as I earned them, and as far as I am concerned, that was part of my compensation for taking below market salary.

It bothers me that the terms are unnecessarily anti-employee. 90 days simply isn't enough time, especially when critical details related to the cap table and liquidation preferences are obfuscated. If they are not prepared to buy shares back at 409a value, they should allow an extended exercise window.

Re: Handcuffed to Uber

#203

Post by DannyBee »

URSpider94 wrote: post #165
DannyBee wrote: post #131

Earlier quoted context omitted.

RSU's are only restricted until vest. Once they vest, they are unrestricted stock. Uber cannot control what you do with that stock (or at least, i'm not familiar with any company that has done so, and not sure that it's legal to do so)

As long as they are private, they can put lots of restrictions on what can be done with shares. That's the point of the whole article. Ultimately, people are allowed to exercise their ISO's and turn them into shares, they just can't do anything with those shares -- Uber won't buy them, and won't allow you to sell them to anyone else! I think the sibling post answered the question -- RSU's don't vest until the company…

ISO != RSU. They are different forms of restricted property, and when it comes to restricted stock, as i said, it's only restricted until vest. They can control when it vests, but even if they are private, they can't control what you do with restricted stock once it is vested, because it is then unrestricted stock, whether uber is private or not.

Re: Handcuffed to Uber

#204

Post by encoderer »

scurvy wrote: post #126
encoderer wrote: post #121

Earlier quoted context omitted.

Black Scholes is used to value options, eg to set the strike price on options. So, it is used for this purpose by companies who need to set option strikes at fmv. I have no idea why he says it's been repudiated. As far as I know, it is still used in public market option pricing. Most people buying or selling options are not pricing them, but accepting the market makers price. How would you have any clue how they're c…

I previously wrote software at a major market maker. I can't say (NDA) what they use, but most professionals consider Black Scholes to be mickey mouse. If you're using it in the public market, you're not going to fare well on American style options. As for real world proof of Black Scholes being garbage, it doesn't get any better than Long Term Capital Management.

I don't know. I read When Genius Failed. I'm quite sure it had little to do with Black Scholes. It was primarily an issue of trading illiquid positions that weren't hedged as well as they thought.

Re: Handcuffed to Uber

#205

Post by encoderer »

scurvy wrote: post #126
encoderer wrote: post #121

Earlier quoted context omitted.

Black Scholes is used to value options, eg to set the strike price on options. So, it is used for this purpose by companies who need to set option strikes at fmv. I have no idea why he says it's been repudiated. As far as I know, it is still used in public market option pricing. Most people buying or selling options are not pricing them, but accepting the market makers price. How would you have any clue how they're c…

I previously wrote software at a major market maker. I can't say (NDA) what they use, but most professionals consider Black Scholes to be mickey mouse. If you're using it in the public market, you're not going to fare well on American style options. As for real world proof of Black Scholes being garbage, it doesn't get any better than Long Term Capital Management.

I don't know. I read When Genius Failed. I'm quite sure it had little to do with Black Scholes. It was primarily an issue of trading illiquid positions that weren't hedged as well as they thought.

Re: Handcuffed to Uber

#206

Post by cplease »

caseysoftware wrote: post #161
cplease wrote: post #151

Earlier quoted context omitted.

If the spread is nonexistent, why exercise at all? Why not just dump your money in an index fund?

I early exercised at Twilio when the spread was pretty small. The key is that you pay taxes on that spread. If you're early enough - I was roughly #25 - and do it early in your tenure, then you only have to come up with the cash to buy the shares and a minor tax bill. If I had waited until I left to execute, the spread would have been 12-15x. I know a few people who stayed 4 years to fully vest and then executed. I d…

Okay; I don't know anything about Twilio in particular, but in the usual non-founder startup employee scenario, where you are busting your balls working crazy hours for less than you could get at a real company, you are already assuming a risk in the form of opportunity cost and job insecurity in exchange for equity; you would triple down on this risk by dumping your savings (or borrowings) into illiquid company stock at zero or nearly-zero discount?

How do you know there will ever be a spread? If your startup fails, your shares are worthless. Or better yet, your shares are diluted out of most of their value by several subsequent rounds of private equity, which generally you have no control over whatsoever, but which will certainly go to enrich the founders. Resulting in even more direct transfer of wealth of your investment, to the founders and venture capitalists.

I'm having trouble understanding why any startup employee would do this, as opposed to exercising stock options when they actually have value and ideally some liquidity. Yeah you have to pay taxes, but that's because you came out ahead.

I don't see anything other than a massive gamble. You've already staked enough of your future on one speculative start-up as an employee; why would you then put a big chunk of your own money at risk? An index fund has reliable long-term returns.

Re: Handcuffed to Uber

#207

Post by cplease »

beambot wrote: post #153
cplease wrote: post #151

Earlier quoted context omitted.

If the spread is nonexistent, why exercise at all? Why not just dump your money in an index fund?

So that you can get restricted stock in the startup you worked at for no out of pocket expense...?

How do I exercise a stock option with no out of pocket expense? Not restricted stock or restricted stock units.

If I exercise an option with no spread, I am paying (at least) as much as it is presently valued.

Re: Handcuffed to Uber

#208

Post by redshirtrob »

limeyx wrote: post #196
redshirtrob wrote: post #99

Earlier quoted context omitted.

Sam Altman has commented on this before. Among other things, he advocates for much longer (10 years) exercise periods for equity grants.[0] He also discusses the need for a change in tax treatment by the IRS. One of the fundamental issues is how options are taxed. Should you exercise an option, you will need to pay taxes on the spread (delta of strike price and current FMV, i.e. latest 409A valuation). In many cases,…

"Should you exercise an option, you will need to pay taxes on the spread (delta of strike price and current FMV, i.e. latest 409A valuation)." This isn't really true with ISOs (hence the point of them). You may get an AMT gain which is ugly, but you don't owe regular taxes on the spread unlike Non-Quals where you would.

TL;DR Talk to your CPA.

Yes, you're absolutely correct. That's a bad job on my part.

ISOs have a chance of pushing you into AMT land. If you exercise ISOs, and the FMV is different than the exercise price, then you should consult with a CPA to find out if you have a tax liability.

When I was in this situation I had a CPA project my taxes for the current year. It turned out that my taxes under the traditional system were more than under AMT, so I didn't have to worry. But this easily could not be the case if the spread is sufficiently large.

Re: Handcuffed to Uber

#209

Post by caseysoftware »

cplease wrote: post #206
caseysoftware wrote: post #161

Earlier quoted context omitted.

I early exercised at Twilio when the spread was pretty small. The key is that you pay taxes on that spread. If you're early enough - I was roughly #25 - and do it early in your tenure, then you only have to come up with the cash to buy the shares and a minor tax bill. If I had waited until I left to execute, the spread would have been 12-15x. I know a few people who stayed 4 years to fully vest and then executed. I d…

Okay; I don't know anything about Twilio in particular, but in the usual non-founder startup employee scenario, where you are busting your balls working crazy hours for less than you could get at a real company, you are already assuming a risk in the form of opportunity cost and job insecurity in exchange for equity; you would triple down on this risk by dumping your savings (or borrowings) into illiquid company stoc…

In my particular case, I had worked in the telecomm industry before and had a good understanding of the alternatives and felt that I understood where things were going and my prediction - still yet to be proven - was that they would win.

But you are right, it is yet another risk. At Twilio, the pay was awful but I felt the longer term risk/reward was worth it.

If I was with $startup and the strike price was $texas-sized, I wouldn't do it while the shares were still illiquid because executing would be so much.

Re: Handcuffed to Uber

#210

Post by cplease »

caseysoftware wrote: post #209
cplease wrote: post #206

Earlier quoted context omitted.

Okay; I don't know anything about Twilio in particular, but in the usual non-founder startup employee scenario, where you are busting your balls working crazy hours for less than you could get at a real company, you are already assuming a risk in the form of opportunity cost and job insecurity in exchange for equity; you would triple down on this risk by dumping your savings (or borrowings) into illiquid company stoc…

In my particular case, I had worked in the telecomm industry before and had a good understanding of the alternatives and felt that I understood where things were going and my prediction - still yet to be proven - was that they would win. But you are right, it is yet another risk. At Twilio, the pay was awful but I felt the longer term risk/reward was worth it. If I was with $startup and the strike price was $texas-si…

Still sounds like an all-around terrible deal to me. But best of luck and hope you see some kind of payoff.
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