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Learn from our mistaaaaakes!
http://www.amazon.com/Introduction-Stock-Options-David-Weekl...
We've found that it dampens the 'build-to-flip' mentality and lets us all enjoy the fruits of our labor while we're building the company, not afterwards =).
I exercised NSO stock options of a private company after being vested for a year. Everything I read indicates I need to declare the spread of current FMV with the value of the option grant date. How do I determine the current FMV if their is no market though?
I've "pre-exercised" before, with a meaning different from what's depicted here in the article. In the "pre-exercise", I was able to exercise the stock before I'd vested in it, with the understanding, of course, that the company would buy back my unvested shares at the exercise price if I left the company before vesting all the options. The disadvantage, of course, is that you pay for your stock up front, and will lo…
Earlier quoted context omitted.
Exactly what does the cap table have to do with your expected outcome, presuming you know the percentage of your allocation, the liquidation preferences and valuation, and the company's runway?
If you don't know who owns the company you don't even know who you work for. It might not matter to most people as long as the cheques don't bounce, but if you want to even hallucinate having a meaningful role in the direction of the company it starts to matter. I really don't know what people are willing to disclose to employees but the SEC rule for public companies is a 5% stake or more is disclosed.
The cap table is, to this whole conversation, a MacGuffin.
Really nice write-up explaining stock options. A few added thoughts sparked by some of the comments already made in this thread and otherwise: 1. The value of options is inextricably linked to tax and you need to understand the tax basics in evaluating the economic risks and benefits of holding and exercising any kind of option. With NQOs, you are taxed on the spread as ordinary income on the date of exercise (meanin…
That being said, my own personal opinion is, if you're in early enough that options are on the table, you've basically taken a bet on the company anyway and you're probably already sacrificing salary for equity. I wouldn't go mortgaging the house to purchase your options, but it's unlikely that's necessary and if you're seeing strike prices of under a couple of dollars per share, then you're probably talking about very affordable options.
In Ireland, the main tax differential is income tax (effective rate of 52%) or CGT (@30%). I didn't pay enough attention to this, so word to the wise of anyone going through this. Go talk to someone now, not when your company is IPO'ing.
Some interesting tidbits here from an Irish perspective which probably applies to lots of other non-US countries on options in US companies:
* Pre-IPO, the fair market value of the share is calculated and reported to the revenue commissioner along with an FX (USD -> EUR) rate set by the ECB. Talk to your finance/accounts dept. who are obliged to report this periodically. This fair market value determines the amount of tax you pay.
* The difference between the fair market value of the share and the strike price is essentially counted as income (not BIK, not CGI) when you exercise. In a lot of cases (Facebook, Twitter, Google, LinkedIn, Workday) the fair market value of the share was substantially less pre-IPO (12 months, 24 months) than post-IPO. That means exercising early in most of these situations would have been to your advantage if you were at these companies. Be aware you're completely subject to market risk here.
* Once you exercise the options and own the stock, then increases are subject to capital gains. An example here might be if the strike price on your options is $1, the fair market value is $2 & your company IPOs at some point in the future at $10. If you purchased options at the earlier milestone with a fair market value of $2 and sold at IPO, you'd pay 52% tax on $1 ($2 - $1) and CGT (30%) on $8 ($10 - $2). If you purchased at IPO and sold immediately, you'd pay income tax on $9 ($10 - $1). However, you need to actually hand over cash to exercise options and pay the tax, so be very aware that this is essentially now an investment.
* FX (USD/EUR) fluctuations can be just as important as stock fluctuations. Make sure you take that in to account. Right now, for example, this isn't quite in your favour, with the USD to EUR rate at high 1.35's/1.37's lately. Look at the currency history. You have options to sell and hold your money in USD (banks in Europe will typically open you a USD account) in which case you can hold until you believe the FX rate comes in line with what you expect. Again, you are subject to market risk here (your investments may go up as well as down!). In Ireland, gains via FX like this are also subject to CGT.
I'm not a tax advisor, but what I hope I'm convincing most people here is that if you do think you just hopped on a rocket ship (a Twitter, Google, Facebook) and you're a non-US resident with a reasonably significant amount of options (1,000+), I'd go talk with a tax consultant immediately and consider at least purchasing some of your options up-front if you've got cash that you're willing to bet with.
We've had a number of high profile IPO's here in Dublin recently (LinkedIn, Facebook, Workday & Twitter) so hopefully this convinces someone who jumps on the next one to go talk to a tax advisor.
I like thinking about shares as a virtual currency. Shareholders are speculating on that currency, and the company is trying to increase its value. Companies can inflate or deflate this currency depending on their performance, perceived potential or by issuing new shares. I consider myself a fairly smart person, who had a reasonable grasp on the basics of financial markets, currencies, etc. That simple paragraph just…
Curious... How did you think about stocks previously?
Really nice write-up explaining stock options. A few added thoughts sparked by some of the comments already made in this thread and otherwise: 1. The value of options is inextricably linked to tax and you need to understand the tax basics in evaluating the economic risks and benefits of holding and exercising any kind of option. With NQOs, you are taxed on the spread as ordinary income on the date of exercise (meanin…
- if you can afford, and think it's a good bet it buy the stock when it is granted to lock in the capital gains and avoid income tax
- otherwise go the exercise and sell route and pay tax at your marginal rate
anything in between IMHO is quite possibly a mistake .... don't forget all those people in the .com crash who'd been granted options at 10c, exercised at 2$ and found themselves at the end of the year without a job and a huge tax bill (and remember, without a job) on increases in value of shares that were now worthless - there are traps here