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Ask HN: My startup has concealed from me that it raised funding. What to do?

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Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#11

Post by josho »

I'm hung up on the fact that you are exercising your options. Why? If the options are set to expire that quickly then something else is amiss as well. Generally you exercise options only when you intend to sell or leave the company and would lose those options. From what you described, you gave no reason for exercising the options.

I'd speak with the founders and enquire why they never executed the agreement, that is the raise that was conditional on getting funded. From a contract point of you, you should be eligible to receive that money.

From a trust point of view you can no longer trust these individuals. Without trust in a small organization I don't see the point in sticking around.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#13

Post by damoncali »

The tax problem is a common one and one of the major downsides to equity compensation in some situations. I've never heard of your particular situation where they didn't keep you informed of the valuation, though. That's fairly awful. I would be livid.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#15

Post by fsk »

There are legitimate reasons to exercise early, if you think the business will be sucessful.

1. You avoid the tax issues the OP faced if you exercise at a lower valuation.

2. It's also more tax efficient if you plan to hold the shares or wait a few years to sell.

It sounds like your bosses are ethically challenged. With 3%, you are an employee and not a cofounder.

Instead of suing them, consider writing it off as a loss and learning experience and move on. As a minority shareholder, they can dilute you out of your shares and you would have no recourse.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#16

Post by hijinks »

josho wrote: post #11

I'm hung up on the fact that you are exercising your options. Why? If the options are set to expire that quickly then something else is amiss as well. Generally you exercise options only when you intend to sell or leave the company and would lose those options. From what you described, you gave no reason for exercising the options. I'd speak with the founders and enquire why they never executed the agreement, that is…

My guess is he's young or this is one of his first early stage startups.

The amount of people I know that were employee #1-3 and exercised all there options cause they were cheap and then found out about capital gains they owed I can count on 3 hands if I had them.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#17

Post by late2part »

josho wrote: post #11

I'm hung up on the fact that you are exercising your options. Why? If the options are set to expire that quickly then something else is amiss as well. Generally you exercise options only when you intend to sell or leave the company and would lose those options. From what you described, you gave no reason for exercising the options. I'd speak with the founders and enquire why they never executed the agreement, that is…

Your assumption is incorrect regarding the reasons for exercising options. Early exercise of options often garners positive tax benefits for the optionee.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#18

Post by msandford »

tarr11 wrote: post #7

Usually there's no need to exercise until you either leave the company or there is some sort of acquisition. As you found out, it can be problematic. Did you have a specific reason to do that? You should definitely talk to a lawyer and an accountant. I could see an argument where your gains would be based on the company's 409A valuation, which can be significantly lower than what the last investors put in. Based on w…

Exercising the options makes it harder for him to get screwed later on. Also it can put you in a better position later on when you sell because you pay capital gains tax on the appreciation of the stock rather than ordinary income tax on the options.

This works because stock is considered an investment where as options are not considered investments (according to the tax code) and by holding the stock for more than a year it's considered "long term" and thus it gets classified as capital gains.

Ultimately I think it's a very smart thing to do especially if the company says that the stock is valued at $0.0001/share meaning that he can exercise 1000 shares per $1. The only time there's ever a downside to exercising early is if your strike price is substantially above $0/share meaning that it might cost a sizable sum. If it's free -- or nearly free -- to exercise, there's really no reason not to.

Unless of course you end up in a situation like this person has.

Re: Ask HN: My startup has concealed from me that it raised funding. What to do?

#19

Post by mdonohue »

josho wrote: post #11

I'm hung up on the fact that you are exercising your options. Why? If the options are set to expire that quickly then something else is amiss as well. Generally you exercise options only when you intend to sell or leave the company and would lose those options. From what you described, you gave no reason for exercising the options. I'd speak with the founders and enquire why they never executed the agreement, that is…

He was exercising options because it is very cheap and he thought it had no tax impact. This also starts the clock on long term capital gains rules. It makes sense for early stage companies.

You might be thinking of this for more established companies where the exercise might require tens or hundreds of thousands of dollars. That's a very different situation.

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