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Options vs. Cash

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Re: Options vs. Cash

#111

Post by sulam »

hinkley wrote: post #80
sulam wrote: post #63

Earlier quoted context omitted.

I've been on the other side of two of these and the explicit alternative in each case was bankruptcy. Also asset transfers are more expensive to the acquirer because you have to explicitly delineate the assets you're buying and what you're not buying. This makes for more lawyer time and pushes the transaction costs up significantly. The real reason to do it is because the team there at the time is more valuable as a…

Nothing I love more than being bought and sold like cattle. Out of curiosity, how do you keep the employees from walking after an asset only transfer? The vague promise to them about future riches has already been broken. And you will up changing business practices that ruffle feathers (I'm not sure how you could avoid it. This stuff is rarely written down). Hell, you'll probably assign them to a new project anyway.…

Payouts! They get some mix of salary (comparable to existing employees), stock (more generous than existing employees) and a cash payout that's fairly generous if they meet some goals laid out in advance.

And you didn't ask, but if not enough of the team accepts an offer, then it evaporates.

Re: Options vs. Cash

#112

Post by izolate »

Is there any way to nicely state that you're not interested in equity and prefer cash? I haven't found it. It seems to put off employers who think of equity as an incentive.

And I've met some fantastic companies who have done this, so it's not about bad employers either.

Re: Options vs. Cash

#114

Post by URSpider94 »

richardwhiuk wrote: post #61
walshemj wrote: post #43

What strikes me as odd given the USA's reputation as the home of the self made millionaire that the taxation of employee options is so broken. Treating options on shares as Income when they are not is just stupid options are a high risk instrument that well be worth nothing as opposed to a higher sallery. Why is there not a PAC made up of tech industry employees lobbying for reform of Federal and state laws and argua…

The alternative is that the tax is entirely on exercise of the option.

It IS entirely on the exercise of the option.

Granting and vesting of ISO's are not taxable events. Exercise of ISO's is taxable under the AMT rules, but only if you are above the AMT threshold (admittedly, this is true for a lot of people)

If you're not hitting the AMT threshold, then you only pay tax when you sell the resulting shares.

Re: Options vs. Cash

#115

Post by URSpider94 »

walshemj wrote: post #43

What strikes me as odd given the USA's reputation as the home of the self made millionaire that the taxation of employee options is so broken. Treating options on shares as Income when they are not is just stupid options are a high risk instrument that well be worth nothing as opposed to a higher sallery. Why is there not a PAC made up of tech industry employees lobbying for reform of Federal and state laws and argua…

If you are arguing that grants of options shouldn't be taxed -- they are not.

If you are arguing that the eventual income from ISO's shouldn't be taxed -- that would be a very odd position, since pretty much every form of income out there in the world is taxed, even illegal income. I can't think of any other income category that is un-taxed under USA tax laws, with the exception of government bonds.

Re: Options vs. Cash

#117

Post by killjoywashere »

So, basically, start-up hires should issue their own term sheet, by which they agree to invest time in exchange for whatever else. Which suggests that human capital is coming on par with the VCs themselves. Interesting...

Re: Options vs. Cash

#118

Post by linkmotif »

$$$$$$$$$ cash cash cash cash cash cash cash cash cash cash cash cash cash cash cash now now now now now now now now or even better yesterday. $$$$$$$$$$. Time value of money!! Time value of (startup) (non-founder) options? Not so much. The expected value of your average Silicon Valley start up with golden handcuffs included must be downright negative.

Re: Options vs. Cash

#119

Post by nemo44x »

walshemj wrote: post #43

What strikes me as odd given the USA's reputation as the home of the self made millionaire that the taxation of employee options is so broken. Treating options on shares as Income when they are not is just stupid options are a high risk instrument that well be worth nothing as opposed to a higher sallery. Why is there not a PAC made up of tech industry employees lobbying for reform of Federal and state laws and argua…

Options are not taxed until you exercise them. At that point they become an asset that contains "value" but until you exercise the option to purchase stock it is simply only the right but not the obligation to purchase stock at a particular price. When issued options you don't have to exercise them and if you don't you do not pay taxes until you decide to.

Often companies offer the ability to "early exercise" options which means you buy them before they have vested and file with the IRS that you have done this. The reason you might do this is because the strike price of your options will likely be the same as "fair market value" of the stock. This means that when you buy them you do not pay any taxes since the difference is 0.

If you wait and exercise your options then you pay tax on the difference between the "fair market value" and your option strike price. This is taxed as a short term capital gain. However, you now hold the equity and if you sell it 1 year or later you pay a long term capital gain which is generally advantageous. This gain is the price you sell minus the value at the time you purchased.

Often, for people issued options they will exercise and sell immediately when/if the company goes public and they can sell. You keep the difference between what you sold them and what your strike is and you pay taxes on that profit.

The biggest issues are when you want to leave a company but have not bought your options. These are golden handcuffs and it's a decision you need to make if you want to buy them. For a company that is looking good you can often get a loan to buy them. But now you're invested in an illiquid investment of which you can't possibly know the real value. That's a big risk with potentially a large payout.

Re: Options vs. Cash

#120

Post by theptip »

Retric wrote: post #95
icedchai wrote: post #58

Earlier quoted context omitted.

Except, all things usually aren't equal. Most people explain dilution like this: you're getting a smaller piece of a bigger pie.

It's zero net gain at the point of dilution. Owning 10% of 10 million or 1% of 100 million is the same money you simply have even less control. Unfortunately, rational people may have very different risk tolerances. Founders often see it as I have a company and X money to work with. The next round means I have a company and X + Y money to work with. In that context having a 90% chance of 10 million is often better th…

Right, but the only reason you'd take on any dilution as a founder is if you think the extra money will make your shares more valuable in the future.
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