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Dear Unicorn, Exit Please

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Re: Dear Unicorn, Exit Please

#41

Post by 7Figures2Commas »

scurvy wrote: post #35
7Figures2Commas wrote: post #27

> This is why companies with skyrocketing valuations are particularly dangerous for employees. Shelling out tens or hundreds of thousands of dollars is hard enough for most. You can imagine needing to pay millions of dollars to acquire your options when you don’t have it. Huh? The exercise price for options is established when employees are granted stock options, which almost always occurs at the beginning of employm…

You should understand the tax (particularly AMT) implications of exercising. $20k cost to exercise. $300k to Uncle Sam (given your 50x increase).

You should understand that every situation is different. Are you talking about NSOs, or ISOs? Have you factored in the minimum tax credit?

Very few articles on ISOs and AMT highlight the minimum tax credit that is applied when the amount paid under AMT exceeds what would otherwise have been paid.

Re: Dear Unicorn, Exit Please

#43

Post by joshjkim »

7Figures2Commas wrote: post #27

> This is why companies with skyrocketing valuations are particularly dangerous for employees. Shelling out tens or hundreds of thousands of dollars is hard enough for most. You can imagine needing to pay millions of dollars to acquire your options when you don’t have it. Huh? The exercise price for options is established when employees are granted stock options, which almost always occurs at the beginning of employm…

It's the AMT issue. In your example, if the company's valuation increased by 50X, the spread between the FMV and the exercise price would be $1,000,000, so you would have to pay taxes on AMT income of $980,000 - assuming AMT is 20%, that's almost $200k. It sucks =)

Of course IF you are lucky enough to have $20K sitting around, enough faith in your company the day you get your options AND your company lets you early exercise, then you can avoid this. Unfortunately, for most folks those conditions are not all met =(

Re: Dear Unicorn, Exit Please

#44

Post by nemo44x »

7Figures2Commas wrote: post #27

> This is why companies with skyrocketing valuations are particularly dangerous for employees. Shelling out tens or hundreds of thousands of dollars is hard enough for most. You can imagine needing to pay millions of dollars to acquire your options when you don’t have it. Huh? The exercise price for options is established when employees are granted stock options, which almost always occurs at the beginning of employm…

Capital gains taxes. When the "fair market value" of the company increases away from your strike price, when you exercise your options you have to pay tax on the difference between your strike price and the fair market value. And it will be a short term capital gain so it isn't cheap. If those .20 options of your have a fair market value of 5.00 now, you will owe tax on 4.80 of capital gains. 4.80 * 100,000 is 480,000.00 and a tax rate of about 40% on that means you will owe $192,000.00 in taxes to exercises $20,000.00 in options. So you will need around $210,000.00 to get out.

And even after that you're holding a non-liquid asset which could be diluted to nothing or the company could simply fail and you can't dump the stock.

Re: Dear Unicorn, Exit Please

#45

Post by sulam »

7Figures2Commas wrote: post #27

> This is why companies with skyrocketing valuations are particularly dangerous for employees. Shelling out tens or hundreds of thousands of dollars is hard enough for most. You can imagine needing to pay millions of dollars to acquire your options when you don’t have it. Huh? The exercise price for options is established when employees are granted stock options, which almost always occurs at the beginning of employm…

The article doesn't state this well, but the additional cost comes from AMT. If you exercise your options you pay AMT on the face value of a share of common stock at time of exercise minus the exercise price (the spread). This is true regardless of whether or not those options are liquid at the time. For a unicorn, the stock has most certainly increased in value over time, which means the exercise price is a fraction (possibly a very low fraction) of the current value, and you'll be writing the IRS a much larger check than you write the company.

The only escape from this problem is an 83(b) election, which I've heard many companies say they don't allow (IANAL and am not sure what the circumstances are here). It's also the case that with an 83(b) election you are putting real money, potentially a significant amount of real money, into the company's bank account with no expectation of when that investment will become liquid. So this also has risks, but at least the AMT is on the spread, which is $0 in this case.

Re: Dear Unicorn, Exit Please

#46

Post by scurvy »

7Figures2Commas wrote: post #36
scurvy wrote: post #18

Allowing employees to make 83B elections on their options immediately after starting would help this situation a lot. Most companies don't "allow" you to do this. I've heard conflicting things on the subject. Some say the company has no say in the matter and it's purely in the IRS' court (exercise and notify IRS). Others say the company must allow you to do it. Second, the bogeyman of "letting some strange interloper…

Just to clarify on this subject: the 83(b) election applies to stock options where early exercise is involved. Not all companies permit early exercise.

I've heard from several sources that the company has no say in the matter. That it's basically rule by fear. That said, thrusting 83b paperwork upon a company that doesn't "allow" it isn't the best way to start your new job.

Also, Peter Thiel always told his portfolio companies to allow 83b elections. It's smart for the employee and the employee. I guess it's a changing of the guard from the Founders Fund types to the YC mania today.

Re: Dear Unicorn, Exit Please

#47

Post by ryandrake »

j_baker wrote: post #11

At most private companies, stock options aren't worth the paper they're written on. Unless of course the company sells, in which case they're worth slightly more than the paper they're written on. And besides that, to exercise them you usually have to pay a pretty hefty sum. I generally don't consider equity as a part of my compensation package when I work for a private company.

Best response so far. Your equity compensation is worth what you can currently sell it for. If you can't sell it, it's worth nothing. You should consider it an extremely fortunate and lucky turn of events should your equity become both liquid and in the money--you shouldn't expect it as a given.

Re: Dear Unicorn, Exit Please

#48

Post by nathan_f77 »

7Figures2Commas wrote: post #27

> This is why companies with skyrocketing valuations are particularly dangerous for employees. Shelling out tens or hundreds of thousands of dollars is hard enough for most. You can imagine needing to pay millions of dollars to acquire your options when you don’t have it. Huh? The exercise price for options is established when employees are granted stock options, which almost always occurs at the beginning of employm…

The company's valuation increases fifty-fold. Now you decide to exercise your stock options, and you pay $20,000. You have just paid $20,000 for stock that is now worth $1,000,000.

The IRS now expects you to pay tax on your $980,000 in income. However, your stock is not liquid, so you can't sell it. This is why you can need "millions" to acquire your options.

Re: Dear Unicorn, Exit Please

#49

Post by joshjkim »

scurvy wrote: post #39
joshjkim wrote: post #34

Earlier quoted context omitted.

you're right on the disclosure issue and cost issue - but I've always been more concerned with voting rights, which a strange interloper would certainly have. Especially in the context of M&A, the risk of a rogue common shareholder can be significant. I don't think it's a show stopper, but it is an issue.

Most founder series preferred shares have voting multipliers built-in. The fear of an interloper led takeover based on voting rights is another myth.

hm, but i don't think most founders have founder series preferred. It was getting more popular for a few years but the trend seems to have died down - if you have evidence to the contrary, I'd be curious to see. Mine's anecdotal but not bad: last 20 cap tables with at least 5 you would recognize as "hot" companies, I didnt see one.

Re: Dear Unicorn, Exit Please

#50

Post by nathan_f77 »

ajross wrote: post #6

While it's no doubt annoying for those involved, I find myself unable to sympathize much with the woes and travails of those poor stock-holding employees of private firms with skyrocketing valuations. Cry me a river, basically. If this is a serious issue that needs to be addressed, it's at most inside baseball not worth the rest of us worrying about.

Many (most?) readers of Hacker News are founders or employees at startups. It's very relevant to most of us.
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