Stock options are complicated

This is great write up. Kudos to the author for taking the time. I did have a question about the following sentence:

>"If an employer gives you straight-up shares, then the IRS will tax the shares (at ordinary income rates) when they vest."

What would be treated as income and taxes here, the strike price x the number of options vesting? Is that correct? For regular worker bees this not very much though right? For instance say an employee has 25 shares vest in a quarter and their stick price is $20. 20 x 25 would be $500 more being taxes as income. Or am I completely not understanding something?

If it is not the strike price being taxes as income what is it, since the the value of an option is often unknown to rank and file employees let alone the IRS.

Stock options are not complicated. Most people who look into the details of them will find them very plain and actually quite simple. The issue is you don't often deal with this area of finance so it looks foreign until you spend some time looking into the terms.

Your options are a contract between you and the company for you to buy shares at a given price.

If the value of the shares is worth more then you pay, the difference is income. "Value" is a 409a valuation ask your CFO what it when you execute.

Enter the accountant who will tell you how much your liability is for that income ( it varies no more then a dozen other factors affecting your yearly taxes )

Your shares are illiquid, and likely worthless. VC's and other institutional investors have contracts with the company that means they will get paid well before and much better then you. This should really be the first point since you should have known this when accepting your compensation package.

In my experience most people at startups who leave end up not exercising their options due to the cost of exercising them coupled with the fact that they may be underpaid due to the assumption that their options may end up quite valuable. So basically they pay somebody 90k/year then give them ~20k/year in options. Then they quit after 2 years and have 90 days to buy like 50k worth of stock at the strike price they were promised.

So they end up paying 50k to buy some common shares (not preferred). An investor who paid 50k to invest in the company most likely got preferred shares, so the young guy who paid 50k who probably can barely afford that is now taking way more risk for a much smaller percentage of the company. If the company goes under the preferred shareholders have a chance to get their money back during a firesale of assets or IP or whatever, but the common shares are screwed.

So I tell virtually everybody unless there is a well established secondary market to sell your shares of your particular company, then don't take the options.

I honestly think the 90 day exercise is totally ludicrous in the startup world. I think that should be a major negotiation point with anybody who is joining a startup. They should just insist on it no matter what.

It's not really a 10 year risk, as you keep the options that have vested whether or not you're still with the company. And if the startup fails, if you haven't exercised, you shouldn't be out any money.

Shares vested x fair market value at vest. So you get 1000 shares when you join, worth $1/share. 250 vest on your first year, and that's when tax is due. But say the company grows and shares are $5/share. 5x250 is 1250 taxed income on the anniversary. Normally at early stages you're talking many thousands of shares though, that can increase rapidly.

The fmv is recalculated every year, or on any fundraise events. It needs to be a defensible number or the irs will be upset