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Two workarounds: 1. Join a startup pre-Series A where the strike price is minimal because there hasn't been a priced equity round yet. Early exercise. 2. Join startups that support Extended Exercise Windows. https://github.com/holman/extended-exercise-windows
I was an early employee at Twilio (#25) and much later at Okta. Following his advice saved me thousands when I early exercised in both cases. My only complaint is that I didn't find and apply his advice sooner.
The author is right. Most of the time it doesn't make sense to exercise. If you join early, the strike price will be lower but the risk will be higher aka the odds are lower. If you join later, the strike price will be higher but the risk should be lower aka the odds are better.
Regardless, having the liquidity at the right time can be hard, especially if you're caught in a layoff and don't have savings.
Anecdotes don’t really matter much on this question. What matters is a) what information do you have at the time you quit b) how much capital do you have and c) what is your risk tolerance. Basically it boils down to your prediction if the stock is going to be worth more than your strike price when it becomes liquid, and if you can tolerate the loss if you predict so and are wrong. Some scenarios this is a very good…
Anecdotes don’t really matter much on this question. What matters is a) what information do you have at the time you quit b) how much capital do you have and c) what is your risk tolerance. Basically it boils down to your prediction if the stock is going to be worth more than your strike price when it becomes liquid, and if you can tolerate the loss if you predict so and are wrong. Some scenarios this is a very good…
In an absolute best case scenario where your strike price is 0 and the stock price is 100 (so the effective gain is infinite%) you're going to have income under the AMT regime of 100, and the effective tax rate under the AMT is around 30%. So you still have to pony up around 1/3rd of the current stock price in capital. This severely constrains the real multiple return that you can achieve when exercising into a non-liquid stock and exposes you to enormous downside risk if those returns do not materialize.
When I left, I bought my stock options.
I got a friendly letter in the mail a few years later telling me that the company had been restructured, and that my shares are now worthless.
If I'm getting shares as a part of equity, then I'll consider that as part of my comp package...however, if they're stock options, I generally completely disregard them: I haven't yet met a startup to change my mind.
Anecdotes don’t really matter much on this question. What matters is a) what information do you have at the time you quit b) how much capital do you have and c) what is your risk tolerance. Basically it boils down to your prediction if the stock is going to be worth more than your strike price when it becomes liquid, and if you can tolerate the loss if you predict so and are wrong. Some scenarios this is a very good…
Except that under US tax law, in that exact situation where you have options with a low strike price and the company's stock price has clearly increased significantly, the difference between the strike price and the stock price will be considered taxable income for the Alternative Minimum Tax (AMT) when you exercise. In an absolute best case scenario where your strike price is 0 and the stock price is 100 (so the eff…
Anecdotes don’t really matter much on this question. What matters is a) what information do you have at the time you quit b) how much capital do you have and c) what is your risk tolerance. Basically it boils down to your prediction if the stock is going to be worth more than your strike price when it becomes liquid, and if you can tolerate the loss if you predict so and are wrong. Some scenarios this is a very good…
Except that under US tax law, in that exact situation where you have options with a low strike price and the company's stock price has clearly increased significantly, the difference between the strike price and the stock price will be considered taxable income for the Alternative Minimum Tax (AMT) when you exercise. In an absolute best case scenario where your strike price is 0 and the stock price is 100 (so the eff…
A couple of points 1) "Don’t forget though, you’ll have to pay taxes, because the value of your shares is likely greater than the price you paid to buy them." This is not true if, like most stock options, yours are ISOs and you don't hit AMT. 2) "I didn’t have enough money" There are now places that'll loan you money secured against the value of the shares themselves. If the alternative is not exercising the shares a…
I think for most folks in tech not hitting AMT with any reasonably sized option grant worth buying will be extremely rare:
1. Options vest, usually over a 4 year span, so if one, two, three years go by at your startup and there isn't a large difference between your strike price and the current valuation, well then that's a huge signal you don't want to buy in any case. 2. Given your average software developer salary and average range of options, it takes very little to actually hit AMT.
Two workarounds: 1. Join a startup pre-Series A where the strike price is minimal because there hasn't been a priced equity round yet. Early exercise. 2. Join startups that support Extended Exercise Windows. https://github.com/holman/extended-exercise-windows
#1 is great for the cash outlay for exercising, but if the company has been even mildly successful with fundraising rounds then the spread will be significant and AMT could crush you.
Earlier quoted context omitted.
Except that under US tax law, in that exact situation where you have options with a low strike price and the company's stock price has clearly increased significantly, the difference between the strike price and the stock price will be considered taxable income for the Alternative Minimum Tax (AMT) when you exercise. In an absolute best case scenario where your strike price is 0 and the stock price is 100 (so the eff…
Even with a 30% tax bill in the worst case, the effective gain is infinite%.