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> "contingent on raising target angel round of financing".
My English is not good enough, so I'm not sure what this means, in particular "target".
If their "target" was $100.000 and they "only" raised $99.000, are they forced to give you the raise?
[Also, as other said, with a 3% you are not a "engineer founder", you are only a "engineer first employed". In any case, talk to a lawyer.]
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 l…
I can't imagine writing this off. He's been seriously wronged, to the tune of quite a lot of money. The raise alone (promised in writing, never delivered) is probably substantial, considering it's been about a year since it should have happened. The tax issue seems less clear, but I have a hard time imagining you wouldn't be liable if you hid important investment details from a shareholder and therefore caused him a…
A lawsuit is a lot of stress.
There's no guarantee he'd win.
The corporation can be bankrupt when/if he wins.
You can't keep working there after you sue them or your lawyer sends them a threat letter.
There's no point continuing to work with dishonest people. Given their dishonesty, the shares are probably worthless.
You shouldn't be in bad shape tax-wise. I don't know Canadian tax law - but in the US, you only get taxed when you sell the shares. Capital gains would not be recognized if you exercised the options and held onto the shares. Since you have been exercising your options - you are a shareholder in the company (or a member depending on the structure) and I would imagine that the company's operating agreement would requir…
That's not exactly accurate in the US. You need to pay income tax - not capital gains - on the spread between the strike price and the fair market value. Since the company is not publicly traded, the fair market value needs to be assessed. The IRS has rules on how to do this, but many companies use independent third party auditors to do this, though an early stage company probably would not do this.
Once an investment has been made, a fair market value has been established, and you need to report the difference between the strike price and the investment price as income when you exercise options. Capital gains applies when you later sell the stock for a gain.
Edit: Though I should point out, this is only for non-qualified stock options. If the options are tied to performance metrics, for instance, this may not apply.
Edit 2: See here for a discussion of this: http://www.investopedia.com/articles/optioninvestor/07/esoab...
It's quite possible, nee probable, that they are just disorganized and genuinely thought you already knew, or that it didn't matter, or otherwise were clueless or inexperienced enough to not really understand what had happened.
I think it would be a mistake to get into it with them on a war footing. Early stage companies like this make mistakes of this kind all the time, and it's not necessarily a sign that the whole ship is doomed. If they have the ability to get revenue and investment and pay salaries and whatnot it's possible that there's a positive outcome in the future.
I would schedule an initial consultation with a lawyer who deals with these kinds of things. Get a referral and schedule an hour or so to go over it with them. They'll probably charge you a few hundred bucks, or even waive it if you have a close friend or existing client of theirs refer you.
Sit down with a lawyer, bring the docs, and explain what happened and get some sense of the implications. Then approach the founders with the attitude that it must be an administrative mistake or misunderstanding. If they are evasive or otherwise shady that should become clear quickly. If they are genuinely concerned and want to help fix the problem then great. But personally I wouldn't blow up your relationship with everyone until you have a better idea which of those two scenarios is more descriptive.
You shouldn't be in bad shape tax-wise. I don't know Canadian tax law - but in the US, you only get taxed when you sell the shares. Capital gains would not be recognized if you exercised the options and held onto the shares. Since you have been exercising your options - you are a shareholder in the company (or a member depending on the structure) and I would imagine that the company's operating agreement would requir…
In a private corporation where an employee is issued stock options, a taxable benefit exists ONLY when you sell the shares for a profit. Unless this is a public company or a non-Canadian controlled company, you will not face a tax liability. Just make sure both owners and any majority investor is a Canadian resident.
Now - there is another question - when you were given the options, were they in the money at the time. This is to say, were the options priced below the FMV at the time of the option being given to you? If they were not, or there was likely no way to tell at that time (they were worthless, and were priced accordingly which it appears), then you will be eligible for an additional tax credit on the gain (it is approximately 50% of the capital gain, it is substantial). Please do your own research in this regard. Also keep in mind selling shares of a QSBC (Qualified small business corporation) means you get up to $800K in TAX FREE gains, once in your life. This is called the life time capital gains exemption. Please do your research here. You likely will pay no tax at all on the capital gain.
You shouldn't be in bad shape tax-wise. I don't know Canadian tax law - but in the US, you only get taxed when you sell the shares. Capital gains would not be recognized if you exercised the options and held onto the shares. Since you have been exercising your options - you are a shareholder in the company (or a member depending on the structure) and I would imagine that the company's operating agreement would requir…
You shouldn't be in bad shape tax-wise. I don't know Canadian tax law - but in the US, you only get taxed when you sell the shares. Capital gains would not be recognized if you exercised the options and held onto the shares. Since you have been exercising your options - you are a shareholder in the company (or a member depending on the structure) and I would imagine that the company's operating agreement would requir…
That's not quite correct with regards to US tax law at least. You can get taxed on the spread between the price you pay and the "fair market value" of the shares received.
It's quite possible to get nailed with an insane tax bill in situations like this. You can end up in a situation where a company raises money at high valuations, and that spread is high, generating a tax bill of hundreds of thousands of dollars on a supposed million dollar spread, and then the company implodes and the shares are worthless, but that tax bill is still there -- leading to a horror story of being taxed on a percentage of the millions of dollars you supposedly got but never realized a dime from. This has happened to real people and is "a very bad thing" to say the least.
You shouldn't be in bad shape tax-wise. I don't know Canadian tax law - but in the US, you only get taxed when you sell the shares. Capital gains would not be recognized if you exercised the options and held onto the shares. Since you have been exercising your options - you are a shareholder in the company (or a member depending on the structure) and I would imagine that the company's operating agreement would requir…
You are upset about something that might not be an issue. You haven't mentioned what type of stock options you have (in the US there are ISO and NQSO, and - upon a quick check - it appears there are different types in Canada as well, with differing tax treatment). Omitting that detail in addition to the ... unusual way in which you exercised them makes me think you may have more of an academic familiarity with the process.
It would have been nice if the founders told you about the investment, but your reaction is completely out of proportion with what happened. Lawyering up [edit: distinct from a consultation] will be the equivalent of ending your career track with them and burning your bridges entirely.
And really, if the market value of your options has increased, consider the positive side of that news if you own 3%.