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Former Uber employees have gone into debt to exercise options they can’t sell

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Re: Former Uber employees have gone into debt to exercise options they can’t sell

#141

Post by LeifCarrotson »

gfodor wrote: post #115
rconti wrote: post #112

Earlier quoted context omitted.

I'd say "risky" rather than "poor". They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning. Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped le…

if you are optimizing for regret minimization I'd probably argue that it's way less regrettable to end up in $200-300k in debt due to a crazy, unexpected snafu occurring (like an economic crash or company crash) than have to know for the rest of your life you could have been a millionaire if you just had bet on the (at the time) reasonably high probability event of eventual liquidity, by exercising options that you w…

I was following you for a while...but can you explain how this is different than taking out a home equity loan, going $200-300k in debt, and buying lotto tickets for a chance to become a millionare? Aside from the fact that you wouldn't know whether you would or would not have won that lotto.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#142

Post by gshulegaard »

niuzeta wrote: post #129

>> One of those former employees paid about $100,000 to exercise more than 20,000 incentive stock options (ISOs), plus a tax bill of over $200,000. The other paid about $70,000 to exercise about 5,000 ISOs, and then about $160,000 in taxes. Maybe it's a common knowledge amongst the Silicon Valley engineers, but for those of us who are not in startup, could someone please explain how this is possible? Specifically, in…

Disclaimer: This a lay-man's understanding...

So you join a shiny new "start up" and they offer you some stock options as part of their compensation package. This is typically done to improve compensation without requiring additional liquidity which is typically a limited resource for a start up.

These "ISOs" (Incentive Stock Options) are usually option agreements where the company agrees to let you "purchase" shares of the company in the future at a strike price equal to current valuation. So even if you "exercise" (purchase) the stock 2+ years later you pay the same price you would have if you had purchased the stock on your first day at the company.

The problem with tax here is that in those 2+ years before exercising your "options" your company may have grown/raised more money with greater valuations...so the value of the stock may have doubled, tripled, or increased in even greater value. Well lucky you! According to your ISO you can purchase the stock for the value it was worth 2+ years ago!

"Hold on just a minute," the IRS says, if you purchase a share for $5 that is "valued" at $25 now...what you actually have is an immediate realized gain of $20. Since you spent $5 and acquired an asset worth $25...you should be taxed AMT on the realized gain of $20. Makes sense.

The issue is with "valued" here. In the case of pre-IPO startups the stock you purchased cannot really be sold. Value of a pre-IPO company's stock is more or less correlated to what investors agreed to in your last round of funding (e.g. I agree to give your company $XXXXXXXX for YY% of your company). But at the end of the day, you pay $5 for a piece of paper that says you have stock in a company that is estimated to have the value of $25...but isn't actually worth anything since you can't actually turn it into money. You can't sell that piece of paper for $25 (in fact, you can't sell that paper at all).

Which means you end up owing taxes on a $20 realized gain on an asset you can't sell. That is, you can't turn around and sell some of that newly acquired stock to pay your tax...again it's not really worth anything...it's estimated value is just higher than what you paid for it.

So the question is...where do you come up with the money to pay this tax? Well, in the case of these individuals, you go into debt.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#143

Post by kemitche »

LeifCarrotson wrote: post #141
gfodor wrote: post #115

Earlier quoted context omitted.

if you are optimizing for regret minimization I'd probably argue that it's way less regrettable to end up in $200-300k in debt due to a crazy, unexpected snafu occurring (like an economic crash or company crash) than have to know for the rest of your life you could have been a millionaire if you just had bet on the (at the time) reasonably high probability event of eventual liquidity, by exercising options that you w…

I was following you for a while...but can you explain how this is different than taking out a home equity loan, going $200-300k in debt, and buying lotto tickets for a chance to become a millionare? Aside from the fact that you wouldn't know whether you would or would not have won that lotto.

The chance of winning the lotto is much much smaller than the chance of Uber surviving to an IPO with value at/above the fair market value that triggered $300k in AMT.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#144

Post by cityzen »

xapata wrote: post #126
gfodor wrote: post #115

Earlier quoted context omitted.

if you are optimizing for regret minimization I'd probably argue that it's way less regrettable to end up in $200-300k in debt due to a crazy, unexpected snafu occurring (like an economic crash or company crash) than have to know for the rest of your life you could have been a millionaire if you just had bet on the (at the time) reasonably high probability event of eventual liquidity, by exercising options that you w…

Plus, in the event you have $300k of debt and no assets, you can file for bankruptcy.

Isn’t this how we ended up with people like Donald Trump? Risky behavior pawned off on everyone else?

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#145

Post by ghaff »

gfodor wrote: post #115
rconti wrote: post #112

Earlier quoted context omitted.

I'd say "risky" rather than "poor". They probably knew it was "risky" in the sense that they were extending themselves but perhaps underestimated the tax consequences or risk of the company's fortunes turning. Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped le…

if you are optimizing for regret minimization I'd probably argue that it's way less regrettable to end up in $200-300k in debt due to a crazy, unexpected snafu occurring (like an economic crash or company crash) than have to know for the rest of your life you could have been a millionaire if you just had bet on the (at the time) reasonably high probability event of eventual liquidity, by exercising options that you w…

Well, a "company crash" is not a wild, unexpected snafu for a startup. It depends on the "facts," such as you know them, of course. But a $200-$300K debt is, bankruptcy option notwithstanding, a major life-altering event if you don't hit your payday. If it's a legitimately high probability payout, it may be a justified risk. But, for most people in that scenario, my guess is that they're wildly overestimating the upside potential.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#146

Post by sockgrant »

pascalxus wrote: post #97
sockgrant wrote: post #10

Yet another reason why taking startup stock sucks. Oh? You managed to actually get stock in a startup that seems to be worth something? And you didn't get diluted to a pittance? And the board / founders didn't try to fire you or ask you to give stock back to the pool? Lucky you, you're one of the 1% of the 1%. Now stay there until the company sells or goes public. Wait -- they got bought? Congratulations, you just wo…

I agree. If the company wants to "align incentives" with employees, then they should offer some kind of revenue/profit sharing.

Revenue would work, probably not profit.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#147

Post by chii »

gshulegaard wrote: post #142
niuzeta wrote: post #129

>> One of those former employees paid about $100,000 to exercise more than 20,000 incentive stock options (ISOs), plus a tax bill of over $200,000. The other paid about $70,000 to exercise about 5,000 ISOs, and then about $160,000 in taxes. Maybe it's a common knowledge amongst the Silicon Valley engineers, but for those of us who are not in startup, could someone please explain how this is possible? Specifically, in…

Disclaimer: This a lay-man's understanding... So you join a shiny new "start up" and they offer you some stock options as part of their compensation package. This is typically done to improve compensation without requiring additional liquidity which is typically a limited resource for a start up. These "ISOs" (Incentive Stock Options) are usually option agreements where the company agrees to let you "purchase" shares…

The strange thing to me is why you get taxed before the sale of the asset (i.e., at the time of purchase).

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#148

Post by chii »

niuzeta wrote: post #134
adt2bt wrote: post #132

Earlier quoted context omitted.

I'm pretty sure it's because his strike price was far lower than the value of those shares. For example, if he pays $100 to get 20 shares at $5/share, but the shares are worth $100 each, he just got $2,000 and will need to pay taxes on that larger amount.

Right. So in the eyes of IRS you just didn't buy something, you in fact gained in net worth, except all those new assets you've purchased is illiquid.

except the valuation is a private estimate.

why can't the tax be levied when the same stock is liquidated into cash? then you'd get a real price, rather than an estimate.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#149

Post by gshulegaard »

chii wrote: post #147
gshulegaard wrote: post #142

Earlier quoted context omitted.

Disclaimer: This a lay-man's understanding... So you join a shiny new "start up" and they offer you some stock options as part of their compensation package. This is typically done to improve compensation without requiring additional liquidity which is typically a limited resource for a start up. These "ISOs" (Incentive Stock Options) are usually option agreements where the company agrees to let you "purchase" shares…

The strange thing to me is why you get taxed before the sale of the asset (i.e., at the time of purchase).

You get taxed on sale as well (as I understand it). I think the issue is that you are purchasing something at a price considered below market value so your estimated net worth changes.

Edit: FTR I think just taxing on sale for the entire realized gain would make sense to me as well...but I imagine this policy is to try and prevent high income individuals from dodging income tax by taking all their compensation in stock.

Re: Former Uber employees have gone into debt to exercise options they can’t sell

#150

Post by lovich »

cityzen wrote: post #144
xapata wrote: post #126

Earlier quoted context omitted.

Plus, in the event you have $300k of debt and no assets, you can file for bankruptcy.

Isn’t this how we ended up with people like Donald Trump? Risky behavior pawned off on everyone else?

its not really moral, but its incentived behavior
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