Startup Equity 101

I wonder how much longer this logic can hold. I have equity in the startup I'm at. It's a very complex platform and in a niche / emerging market.

Yet could AI feasibly generate a similar (or better) app in a few years? It used to be unthinkable. Now, I'm not so sure.

The development cost of software could feasibly drop to negligible levels. It no longer seems like sci-fi, more and more it seems like the inevitable direction of travel.

What happens to my equity? Welp. Might not be great news.

Always treat startup equity as 0 until you've sold it.

At a startup where I've exercised 75% of my options because the company seems to be going to a direction where maybe it's public in a little while (and I've got some other investments which prevent me from being over-invested here). I also want to dump all of the shares as soon as they go public and I'm able (employee sale window-wise) as I anticipate that there'll be a pop followed by a drop. This is all anecdotal given what I've observed over the years. As a result of exercising everything early (back into the S&P) on I'll be able to get long-term capital gains which is a motivator.

So that all said I agree with the author's take of "maybe" exercising before an IPO is worth it. This is my first time in a role where I've actually got pre-IPO Options. My last role I joined right before the company went public. The agreement there was that I'll get x$ worth of shares where the quantity is determined by the price 3 months or so after the IPO. They went from >$100 per share to like $30 a share which coincided with when I was assigned my shares lol. Oh well.

I agree AMT itself is not a particularly complicated calculation. But I don't think that was really the point of that quoted statement. The complicated part is figuring out if and when AMT applies to you, and, essentially, for how long it can raise your taxes.

As you said, the tax code requires you to calculate your taxes twice - once using the "normal" rules, and another time using the AMT rules, and you pay whichever is higher. So, depending on your individual circumstances, it's non-trivial to know if AMT will apply to you when making particular money movements during the year. Also, if you have to pay AMT in year one, but then in year two the calculated AMT is below your normal tax calculation, you get a credit for the excess amount (i.e. amount over the normal tax from year 1) up to the delta between the normal tax and the AMT amount. In other words, AMT can often times just cause tax to be paid earlier, but the total amount of money (over years), ends up being the same. Of course, the time value of money comes into play - paying a tax earlier is losing money.

So, point being, there are complicated considerations to take into account.

One thing no one told me:

When you cofound a company, its not the equity percent, but who is in control that matters. If you have 40%, and they get 60%, but legally or otherwise (you are the face of the company), then you have control and the 40% is worth more than the 60.

If you leave early after cofounding a company, there is no saying what happens to you shares, and likely they will be diluted to almost nothing

Its all about control.

If you are an employee, either go for a company thats a few years from IPO, a generational startup, or consider the equity worth 0.