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Filing Taxes After Exercising Start Up Options

bradygentile.com

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Re: Filing Taxes After Exercising Start Up Options

#11

Post by lloyddobbler »

harryh wrote: post #7

Semi related to this blog post: A lot of people don't realize that you can exercise ISOs before they vest. If you are sure that you are going to be exercising your options there is no reason to wait until they vest and, in fact, there are disadvantages to doing so. As soon as you get your options (within 30 days. there is a time limit.) you tell your company you want to exercise then and file and 83B with the IRS ind…

IIRC, this is on a company-by-company basis. Only some companies offer early exercise (i.e., exercising your options prior to vesting).

It's a great practice to do, if you believe the company is going to do well. Goes a long way towards minimizing the AMT burden.

Re: Filing Taxes After Exercising Start Up Options

#12

Post by harryh »

lloyddobbler wrote: post #11
harryh wrote: post #7

Semi related to this blog post: A lot of people don't realize that you can exercise ISOs before they vest. If you are sure that you are going to be exercising your options there is no reason to wait until they vest and, in fact, there are disadvantages to doing so. As soon as you get your options (within 30 days. there is a time limit.) you tell your company you want to exercise then and file and 83B with the IRS ind…

IIRC, this is on a company-by-company basis. Only some companies offer early exercise (i.e., exercising your options prior to vesting). It's a great practice to do, if you believe the company is going to do well. Goes a long way towards minimizing the AMT burden.

Yes, this is true. I will add that I have found that if you ask hard enough there is a good chance that companies that say that they don't do this at first will end up allowing you to do so. There's really no good reason for them not to.

Re: Filing Taxes After Exercising Start Up Options

#13

Post by tunesmith »

Is there ever any reason to exercise options with a FMV below the strike price? I know someone who left her job and is in that situation (private company), seems like she should just ignore them entirely and let the options expire. I suppose if she had good reason to believe the company would bounce back they'd be nice to have, but otherwise it seems just like buying stock for more than the going market rate.

Re: Filing Taxes After Exercising Start Up Options

#14

Post by argigg »

harryh wrote: post #7

Semi related to this blog post: A lot of people don't realize that you can exercise ISOs before they vest. If you are sure that you are going to be exercising your options there is no reason to wait until they vest and, in fact, there are disadvantages to doing so. As soon as you get your options (within 30 days. there is a time limit.) you tell your company you want to exercise then and file and 83B with the IRS ind…

To state the obvious, the downside of early exercise is you might lose that money if the company does poorly.

Re: Filing Taxes After Exercising Start Up Options

#15

Post by caseysoftware »

harryh wrote: post #7

Semi related to this blog post: A lot of people don't realize that you can exercise ISOs before they vest. If you are sure that you are going to be exercising your options there is no reason to wait until they vest and, in fact, there are disadvantages to doing so. As soon as you get your options (within 30 days. there is a time limit.) you tell your company you want to exercise then and file and 83B with the IRS ind…

Close, but not quite. The time limit is to when you have to file the 83b with the IRS to document the early exercise. The rest of what you said applies.

The key thing is that you want the delta (between exercise price and FMV) to be as small as possible. Of course, none of that matters if the company isn't going to succeed anyway.

* And yes, I have done this. I early exercised all of my shares at Twilio.

Re: Filing Taxes After Exercising Start Up Options

#16

Post by rosser »

caseysoftware wrote: post #15
harryh wrote: post #7

Semi related to this blog post: A lot of people don't realize that you can exercise ISOs before they vest. If you are sure that you are going to be exercising your options there is no reason to wait until they vest and, in fact, there are disadvantages to doing so. As soon as you get your options (within 30 days. there is a time limit.) you tell your company you want to exercise then and file and 83B with the IRS ind…

Close, but not quite. The time limit is to when you have to file the 83b with the IRS to document the early exercise. The rest of what you said applies. The key thing is that you want the delta (between exercise price and FMV) to be as small as possible. Of course, none of that matters if the company isn't going to succeed anyway. * And yes, I have done this. I early exercised all of my shares at Twilio.

Slight clarification:

The key thing is that you want the delta (between exercise price and FMV) to be as small as possible — at the time of exercise.

If you exercise any time but (effectively) immediately upon being granted your ISOs, you're liable for the taxes on the delta between your strike price and the FMV at time of exercise. If you exercise immediately, that should be zero. But it's that delta — between strike price and FMV at time of exercise — that can factor into AMT in a particularly surprising, and often very unpleasant way.

Forward-exercising and making an 83(b) election also starts the clock ticking on capital gains tax. Effectively, if you're starting at a brand new unicorn, and exercise your entire grant on Day 1, you'll only owe Long-Term Capital Gains tax (15%, instead of regular income rates — or, worse, AMT) on the entirety of your (initial) option grant, the day you hit your vesting cliff.

IANA Tax Attorney, or Accountant. Caveat lector.

Re: Filing Taxes After Exercising Start Up Options

#17

Post by mnutt »

harryh wrote: post #12
lloyddobbler wrote: post #11

Earlier quoted context omitted.

IIRC, this is on a company-by-company basis. Only some companies offer early exercise (i.e., exercising your options prior to vesting). It's a great practice to do, if you believe the company is going to do well. Goes a long way towards minimizing the AMT burden.

Yes, this is true. I will add that I have found that if you ask hard enough there is a good chance that companies that say that they don't do this at first will end up allowing you to do so. There's really no good reason for them not to.

I would imagine that the reason many companies are reluctant to do this (or at least don't advertise it) is because advising employees whether they should or should not do it amounts to giving financial planning advice. Asking hard enough probably means showing you have weighed your own financial situation and understand the risks.

Re: Filing Taxes After Exercising Start Up Options

#18

Post by harryh »

caseysoftware wrote: post #15
harryh wrote: post #7

Semi related to this blog post: A lot of people don't realize that you can exercise ISOs before they vest. If you are sure that you are going to be exercising your options there is no reason to wait until they vest and, in fact, there are disadvantages to doing so. As soon as you get your options (within 30 days. there is a time limit.) you tell your company you want to exercise then and file and 83B with the IRS ind…

Close, but not quite. The time limit is to when you have to file the 83b with the IRS to document the early exercise. The rest of what you said applies. The key thing is that you want the delta (between exercise price and FMV) to be as small as possible. Of course, none of that matters if the company isn't going to succeed anyway. * And yes, I have done this. I early exercised all of my shares at Twilio.

You're totally right. I mis-spoke (mistyped?). Thanks for the correction.

Re: Filing Taxes After Exercising Start Up Options

#19

Post by hkmurakami »

harryh wrote: post #12
lloyddobbler wrote: post #11

Earlier quoted context omitted.

IIRC, this is on a company-by-company basis. Only some companies offer early exercise (i.e., exercising your options prior to vesting). It's a great practice to do, if you believe the company is going to do well. Goes a long way towards minimizing the AMT burden.

Yes, this is true. I will add that I have found that if you ask hard enough there is a good chance that companies that say that they don't do this at first will end up allowing you to do so. There's really no good reason for them not to.

There is one "good reason". To hand cuff and trap employees. I hope that the incidence rate for this is low, but it must be non zero.

(I think pre series A companies should give out RSUs and not options to avoid these situations)

Re: Filing Taxes After Exercising Start Up Options

#20

Post by andrewf »

harryh wrote: post #7

Semi related to this blog post: A lot of people don't realize that you can exercise ISOs before they vest. If you are sure that you are going to be exercising your options there is no reason to wait until they vest and, in fact, there are disadvantages to doing so. As soon as you get your options (within 30 days. there is a time limit.) you tell your company you want to exercise then and file and 83B with the IRS ind…

What happens if/when you leave before all your ISOs have vested? Do you forfeit the exercise price for the unvested stuff, or does the company typically refund it?
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