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I'm curious, can you sell your options without exercising them or are the kinds of options you get from an employer not the kind of options you buy from an exchange?
Earlier quoted context omitted.
The US is probably the worst in this respect, and I heard Canada is quite bad, but most of European tax systems follow the "pay taxes only when money comes your way" principle, which puts all investors on equal footing.
What is the trap / bad part in Canada?
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 ins…
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 n…
This is the piece I was missing. Thank you for the clear explanation.
That being said it would be interesting to buy exercise them just to see what the company is actually valuing those options at, since this is often opaque to the average worker. I wonder if it's possible to exercise a single option and use it as a barometer of sorts to quantify you actual compensation? My guess is no.
Earlier quoted context omitted.
What is the trap / bad part in Canada?
Last time taxes came up, some canadians described the traps. I don't remember but I'm sure they'll be here again....
So, if you exercise some options, it'll trigger a tax bill on the income. No problem, at tax time you can either pay cash or sell shares to cover. But if in the meantime the company tanks and the stock drops to zero, that's capital losses and doesn't cancel out the tax bill on the income.
Basically you want to exercise only when you're able to sell right away.
http://www.theglobeandmail.com/globe-investor/personal-finan...
Earlier quoted context omitted.
The US is probably the worst in this respect, and I heard Canada is quite bad, but most of European tax systems follow the "pay taxes only when money comes your way" principle, which puts all investors on equal footing.
What is the trap / bad part in Canada?
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 we…
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 we…
Unfortunately, while the number of options, salary, holiday, etc are relatively easy for a company to change, I think changing the contracts around exercising for a single employee is a change large and complicated enough that companies are unlikely to do it.