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Should you buy your stock options when you quit?

nealshyam.com

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Re: Should you buy your stock options when you quit?

#21

Post by compiler-guy »

khuey wrote: post #14
gfodor wrote: post #8

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…

This falls under the, "Do I have enough capital to make the purchase?" question. And if the company fails, you get to write all this off at the previously taxed price.

Definitely a factor to consider, but not dispositive.

Re: Should you buy your stock options when you quit?

#22

Post by [deleted] »

vincentmarle wrote: post #17
khuey wrote: post #14

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…

If your strike price is near 0 then you should have done early exercise with 83b election to avoid the AMT tax (if your company permits this of course).

[deleted]

Re: Should you buy your stock options when you quit?

#23

Post by compiler-guy »

khuey wrote: post #20
coherentpony wrote: post #16

Earlier quoted context omitted.

Even with a 30% tax bill in the worst case, the effective gain is infinite%.

No, it's not, because you have to pay the tax bill whether or not you ever see any returns.

If the company fails, I get to write the taxed valuation off as a loss on my future taxes.

So this comes down to "Do I have enough capital and time to see it through?"

Re: Should you buy your stock options when you quit?

#24

Post by cbanek »

compiler-guy wrote: post #23
khuey wrote: post #20

Earlier quoted context omitted.

No, it's not, because you have to pay the tax bill whether or not you ever see any returns.

If the company fails, I get to write the taxed valuation off as a loss on my future taxes. So this comes down to "Do I have enough capital and time to see it through?"

That's true, but it may take a while for the company to fail, and in the meantime, perhaps no one wants to buy your stocks. I think there might be some way to give them back to the company if they want to, but not being able to sell them, even for a loss, keeps the loss from being realized and therefore deducted as a capital loss.

Re: Should you buy your stock options when you quit?

#25

Post by jrdngonen »

As the author mentions, these sort of decisions can be very nuanced (thinking about valuation, dilution, liquidation preference, exit value, etc.).

Happy to help anyone thinking through these situations.

Put together some helpful resources and tools here: https://withcompound.com/equity

Some other useful guides:

https://www.holloway.com/g/equity-compensation

https://fortune.com/2016/09/27/the-complete-guide-to-underst...

Re: Should you buy your stock options when you quit?

#26

Post by thorwasdfasdf »

I worked at a startup for 5 years. the company recently had been valued at 700Million but only had 1 secondary offer, where I sold as much stock as they would let me (15% ~ worth roughly 6k pretaxes).

And when I left I had more stock options than anyone else there. But, the fact that they didn't have more liquidity events and the fact that I couldnt sell more of my stock, is kinda of a red flag. If no one else in the market wants the investment (no liquidity events), it's usually a bad sign. It was a pretty easy decision to not buy the rest of it. I think most of my coworkers bought theirs. Of course, it turned out they were all worthless.

Re: Should you buy your stock options when you quit?

#27

Post by agrippanux »

Short answer, from experience: unless the company is on a clear track to a liquidation event, no.

That said I bought half the options of my last company because the strike price -> FMV was great enough to take the risk. However I consider that a gamble equal to rolling pass line in Vegas, and I didn't make the bet with money I needed to live on.

Re: Should you buy your stock options when you quit?

#28

Post by jefftk »

> Most startups only give you 90 days to buy your options once you leave. After that, they expire and revert back to the company.

This is the real problem here. While this used to be standard, many startups have started offering employees the maximum ten years allowed by the IRS. This is something to consider when joining a company: if they're not willing to give you the full ten years, why not? More: https://triplebyte.com/blog/extending-stock-option-exercise-... https://zachholman.com/posts/fuck-your-90-day-exercise-windo...

Re: Should you buy your stock options when you quit?

#30

Post by kingnothing »

imroot wrote: post #15

I worked for CollabNet from 2005-2010. 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…

Can anyone chime in as to how it is legal to remove someone's ownership from a company like that?
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