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Filing Taxes After Exercising Start Up Options

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Re: Filing Taxes After Exercising Start Up Options

#31

Post by romanhn »

harryh wrote: post #30
romanhn wrote: post #27

Earlier quoted context omitted.

The caveat is that you lose whatever taxes you paid on exercising unvested shares. Gotta be really careful with that, as the taxes could cost way more than the exercise itself.

The idea with early exercising is to not pay any taxes because you exercise at the strike price.

Sure, but there are instances when that's not the case, e.g. early exercise implemented by company after the fact, or holding off buying until you're reasonably sure that the shares won't tank next month.

Re: Filing Taxes After Exercising Start Up Options

#32

Post by hkmurakami »

dickfickling wrote: post #22
hkmurakami wrote: post #19

Earlier quoted context omitted.

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)

the "early exercise" that harryh refers to carries the same handcuffs as an option grant - a (typically) four year vesting schedule. The difference is that instead of vesting "the option to purchase shares" you vest the removal of the option for the company to repurchase the shares it sold you, at the original purchase price. In other words, if I exercise early and leave after two years, the contract states that my e…

Early exercise minimizes the tax burden reason for handcuffing.

Re: Filing Taxes After Exercising Start Up Options

#33

Post by Buge »

EternalData wrote: post #10

There should be a guide overall on how RSUs work, especially in an early-stage context, for startup employees. I feel like people toss percentages around but don't grasp the meaning of what they're about. This guide basically convinced me I need to talk to an attorney and accountant haha.

As I understand it, RSUs are a lot simpler. You don't need to do anything when they are granted to you. And when they vest, they count as normal income at the value at vest time.

Re: Filing Taxes After Exercising Start Up Options

#34

Post by hijinks »

hkmurakami wrote: post #32
dickfickling wrote: post #22

Earlier quoted context omitted.

the "early exercise" that harryh refers to carries the same handcuffs as an option grant - a (typically) four year vesting schedule. The difference is that instead of vesting "the option to purchase shares" you vest the removal of the option for the company to repurchase the shares it sold you, at the original purchase price. In other words, if I exercise early and leave after two years, the contract states that my e…

Early exercise minimizes the tax burden reason for handcuffing.

sometimes startups put the strike price below current valuation if they've raised at least their A round.

Re: Filing Taxes After Exercising Start Up Options

#36

Post by sokoloff »

maverick_iceman wrote: post #35

It is ridiculous to charge taxes based on fictitious paper valuations. I think taxes should be imposed only when shares are sold resulting in cash.

If you act in a certain way, you are free to accomplish that for yourself. Only ever do a same-day exercise-and-sell. Never exercise early. Never exercise-and-hold. Enter into a 10b5-1 that ensures you sell any shares immediately upon vesting. I think that covers all the cases and you're protected against being taxed on paper-only valuations.

That doesn't mean that your preference should preclude other people from acting differently.

Re: Filing Taxes After Exercising Start Up Options

#37

Post by mbesto »

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…

This also requires that you have the money to pay for it at that moment too right?

In other words - I get 10k options at $1 strike price, in order to exercise within 30 days I need to pay $10,000. Correct?

Re: Filing Taxes After Exercising Start Up Options

#38

Post by maerF0x0 »

sokoloff wrote: post #36
maverick_iceman wrote: post #35

It is ridiculous to charge taxes based on fictitious paper valuations. I think taxes should be imposed only when shares are sold resulting in cash.

If you act in a certain way, you are free to accomplish that for yourself. Only ever do a same-day exercise-and-sell. Never exercise early. Never exercise-and-hold. Enter into a 10b5-1 that ensures you sell any shares immediately upon vesting. I think that covers all the cases and you're protected against being taxed on paper-only valuations. That doesn't mean that your preference should preclude other people from ac…

But it does mean that one has to abandon said "fictitious" value if ever leaving a company (usually 90 days) .

Re: Filing Taxes After Exercising Start Up Options

#39

Post by prostoalex »

hijinks wrote: post #34
hkmurakami wrote: post #32

Earlier quoted context omitted.

Early exercise minimizes the tax burden reason for handcuffing.

sometimes startups put the strike price below current valuation if they've raised at least their A round.

They cannot. Backdating or artificially deflating the asset price is no longer legal.

What's likely to happen is new investor extracting some special terms for their investment, receiving preferred stock that's valued higher than common stock. The company then turns around and uses the product of preferred stock price and total number of shares outstanding as the new valuation number that's "leaked" to the press.

The 409A valuation of the common stock is a separate dollar figure, though.

Re: Filing Taxes After Exercising Start Up Options

#40

Post by maerF0x0 »

tunesmith wrote: post #13

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.

Access/control is the only reason I can come up with.

Access: One often doesnt have an option to buy shares in a private company besides the granted options.

Control: If one had 49% of share and options as you described for 2% one could take control of the company? Extremely edge case.

She could hold them until just before the expiry to see if they do bounce back in the window.

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