Ask HN: How exactly do stock option grants work? • Hacker News Board

Re: Ask HN: How exactly do stock option grants work?

#11

Post by arfrank » Fri, Sep 10, 2010, 5:30 PM UTC

bmelton wrote: post #10

craigkerstiens wrote: post #7

To add to the vesting discussion, there's typically a cliff. What this means is that you have access to none of your options until that time, a 1 year cliff is pretty common. If you see in your packet something about a 1 year cliff this means that on you're 1 year anniversary you have access to 20% of your available options. Typically you'll then vest the additional amount each month following until you've fully vest…

What happens if a liquidity event occurs within the first year, before the cliff? Do I still have my options, and am just unable to exercise them?

It depends on the event. You would still have the options, but might not be able exercise any of them until a cliff is reached. The event might also include a trigger of some sort that accelerate the cliff/vesting schedule, but I think this is usually just a mechanism for founders & early employees.

Re: Ask HN: How exactly do stock option grants work?

#12

Post by tptacek » Fri, Sep 10, 2010, 5:41 PM UTC

jbail wrote: post #2

Does this mean I have to buy into my own stock? Yes, but most people don't exercise their options until a liquidity event (company gets sold, goes public, etc). When this happens, you hope the shares are worth more than your option price. If so, you can exercise your options and make profit between your option price and the current price. This is the zero risk way to do it. Also it looks like it will take five years…

You'll very likely have to execute your options when you leave the company, or give up your exposure to the company's upside.

Re: Ask HN: How exactly do stock option grants work?

#13

Post by js2 » Fri, Sep 10, 2010, 6:07 PM UTC

You should spend some time reading about what ISOs are, how they are taxed, and in particular, if an 83 (b) election is an option, it is probably something you want to do. There are pretty good explanations at http://fairmark.com/execcomp/index.htm

Re: Ask HN: How exactly do stock option grants work?

#14

Post by dabent » Fri, Sep 10, 2010, 6:16 PM UTC

tptacek wrote: post #8

All of this is standard. You probably aren't getting screwed. You've been given options, not actual stock. This should not concern you. The difference between options and stock is largely a tax matter. In both cases, you've received an instrument with a very low current price that will be lucrative to you if the price appreciates (in, for instance, a takeover). When you leave the company, you'll be required to shell…

> When you leave the company, you'll be required to shell out some cash to keep your exposure to the company's upside

I'm not sure what that means. He has to purchase the options in order to exercise them later? I thought once something "vested" it was yours to keep.

Re: Ask HN: How exactly do stock option grants work?

#15

Post by btilly » Fri, Sep 10, 2010, 6:16 PM UTC

brk wrote: post #4

#include You basically have the "option" to purchase the stock for a set price (your strike price) for some period of time. Yes, to exercise your options you would have to purchase the stock at the strike price, and then sell it at the current (higher) price. With few exceptions, you can't do any of this until/unless the company IPO's and is publicly traded. Because you have not been granted anything of direct value…

And I HIGHLY recommend you don't purchase any of the vested shares until the company is public, and only then when you intend to exercise them immediately (which is generally a cashless transaction).

Usually true, but not always. There are situations in which purchasing shares over several years prior to a pricing event can avoid AMT screwing you. It is rare, but it happened to me once. It happens when the details of the pricing event count as income under AMT, but not under ordinary tax rules. If you have large deductions under ordinary tax rules (the most common is the federal deduction for taxes paid to the state), then AMT can hit you.

If you think this might happen to you, discuss with a competent accountant. The rules are complex, I don't know them, and all I can usefully tell you is that it is possible, it is rare, and I very nearly was in a case where it would have happened. (I was careful to purchase options early so that eBay's purchase of Rent.com with stock would not trigger AMT consequences. Then the deal was changed to cash and it didn't matter.)

Re: Ask HN: How exactly do stock option grants work?

#16

Post by js2 » Fri, Sep 10, 2010, 6:18 PM UTC

elbrodeur wrote: post #5

Congratulations! Vest in peace. Now, it's been a while since I've had to think about any of this, but I'll try to answer your questions: ISOs (Incentive Stock Options) are options that do not carry a tax burden. Meaning, if you exercise your options (purchase them at the strike price) you do not have to pay taxes on any profits you make on them. Common stock is called common to differentiate it from preferred stock w…

> Meaning, if you exercise your options (purchase them at the strike price) you do not have to pay taxes on any profits you make on them.

Huh? You absolutely have to pay taxes on any profit you make when you sell the shares. In addition, you may also need to pay taxes at the time of exercise on the difference between the strike price and the fair market value, in the form of AMT.

http://fairmark.com/execcomp/isoexer.htm

Re: Ask HN: How exactly do stock option grants work?

#17

Post by js2 » Fri, Sep 10, 2010, 6:20 PM UTC

dabent wrote: post #14

tptacek wrote: post #8

All of this is standard. You probably aren't getting screwed. You've been given options, not actual stock. This should not concern you. The difference between options and stock is largely a tax matter. In both cases, you've received an instrument with a very low current price that will be lucrative to you if the price appreciates (in, for instance, a takeover). When you leave the company, you'll be required to shell…

> When you leave the company, you'll be required to shell out some cash to keep your exposure to the company's upside I'm not sure what that means. He has to purchase the options in order to exercise them later? I thought once something "vested" it was yours to keep.

Nope. Vesting gives you the ability to purchase the shares. Once you leave a company, you typically have 30 days to purchase what you vested, else you surrender them back to the company.

Re: Ask HN: How exactly do stock option grants work?

#18

Post by tptacek » Fri, Sep 10, 2010, 6:25 PM UTC

dabent wrote: post #14

tptacek wrote: post #8

All of this is standard. You probably aren't getting screwed. You've been given options, not actual stock. This should not concern you. The difference between options and stock is largely a tax matter. In both cases, you've received an instrument with a very low current price that will be lucrative to you if the price appreciates (in, for instance, a takeover). When you leave the company, you'll be required to shell…

> When you leave the company, you'll be required to shell out some cash to keep your exposure to the company's upside I'm not sure what that means. He has to purchase the options in order to exercise them later? I thought once something "vested" it was yours to keep.

As I understand it, with ISO's, the options generally need to expire within a small number of months after an employee leaves. Regardless of the particulars, in every case I'm familiar with (myself and friends), leaving the company requires you to exercise options or walk.

Vesting gives you the right to exercise. It doesn't do anything else for you.

Re: Ask HN: How exactly do stock option grants work?

#19

Post by kevinpet » Fri, Sep 10, 2010, 6:25 PM UTC

acqq wrote: post #9

wlfsbrg wrote: post #3

Earlier quoted context omitted.

This is great, thanks for the insight jbail. I want to clarify using an example (not using real numbers): I am granted 100k options at exercise price of $0.10, so the total amount it would cost me would be $10k to purchase them. The company is sold with shares being valued at $10 each. I spend $10,000 purchasing the shares, which then I would see a return of $990,000?

But AFAI understand before the IPO you can't buy anything, even if the shares are valued some value in some company to company transaction. AFAIK it's not about company being sold, it's only once it's on the market (and other conditions you have are met) that you can execute your options. Then you don't have to worry to even have the mentioned 10K USD, you'll be able to get the difference between the real price of th…

You can buy before the IPO, but you won't have anywhere to sell them. Buying before IPO is risky because you may face taxes on the difference between the strike price and fair market value, but not be able to turn any of the paper profit into actual cash to pay the taxes.

Re: Ask HN: How exactly do stock option grants work?

#20

Post by dabent » Fri, Sep 10, 2010, 6:44 PM UTC

tptacek wrote: post #18

dabent wrote: post #14

Earlier quoted context omitted.

> When you leave the company, you'll be required to shell out some cash to keep your exposure to the company's upside I'm not sure what that means. He has to purchase the options in order to exercise them later? I thought once something "vested" it was yours to keep.

As I understand it, with ISO's, the options generally need to expire within a small number of months after an employee leaves. Regardless of the particulars, in every case I'm familiar with (myself and friends), leaving the company requires you to exercise options or walk. Vesting gives you the right to exercise. It doesn't do anything else for you.

I think I get it, so when you said "shell out some cash to keep your exposure to the company's upside" you mean buy the options for the value you were granted them (the "strike price" I think). Is that right?