Should you buy your stock options when you quit? • Hacker News Board

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

#51

Post by jhallenworld » Thu, Sep 05, 2019, 5:39 PM UTC

compiler-guy wrote: post #21

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…

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.

But be careful with this: you can write off only $3000 per year of it against ordinary income. I knew someone during the dot-com bubble who had to take a mortgage to pay his AMT from buying his options, then the stock tanked and he could only write off this $3000 a year...

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

#52

Post by strken » Thu, Sep 05, 2019, 5:47 PM UTC

harryh wrote: post #35

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…

If CollabNet had given you stock instead of options as part of your comp package they would have ended up just as worthless as your (exercised) options. It's a bit weird that you would take wildly different views on the value of one vs the other.

Would you rather have something worthless at no cost, or buy something worthless because you couldn't estimate the cost and then lose all your money?

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

#53

Post by MK_Dev » Thu, Sep 05, 2019, 5:50 PM UTC

"What’s 75%, of half a percent, of a million dollars? $37,500"

It's a risk, and as such, one should aim at a billion, not a million, that's what investors expect anyway. So by that logic, the return could be much much bigger.

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

#54

Post by harryh » Thu, Sep 05, 2019, 5:58 PM UTC

strken wrote: post #52

harryh wrote: post #35

Earlier quoted context omitted.

If CollabNet had given you stock instead of options as part of your comp package they would have ended up just as worthless as your (exercised) options. It's a bit weird that you would take wildly different views on the value of one vs the other.

Would you rather have something worthless at no cost, or buy something worthless because you couldn't estimate the cost and then lose all your money?

Stock grants aren't costless. You have to pay taxes on them (at either the time of grant or time of vest).

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

#55

Post by zaroth » Thu, Sep 05, 2019, 6:43 PM UTC

akchin wrote: post #50

zaroth wrote: post #33

One factor for me would be if the company was aggressive enough in its 409a valuations of common stock. If they are valuing the common stock based on the last funding round which sold preferred shares, you are likely significantly overpaying both for your exercise price and in AMT tax, and that makes the investment significantly riskier. If common share FMV is discounted appropriately, IMO a 409a valuation will refle…

This is not fully accurate. You have to pay AMT on the difference between your strike price and the current 409a price of common. It doesn't have much to do with where preferred is valued, other than the fact that a high preferred value, means that the updated 409a common might be higher. So let us say, your strike price is $0.50 and you are fully vested after 4 years. The company recently does a round where preferre…

That’s exactly what I was trying to say — specifically the 409a valuations for several companies I’ve been at were not appropriately reduced for common shares versus the preferred.

E.g. a company raising $5m Series D at a $30 million valuation, and which already has $10m in preferences. First you have to adjust the valuation because that $5m will be the first dollar out and might even be participating preferred - so they are getting 1/6th of the company for $5m but they are also getting basically a $5m note payable.

If you asked them what they would pay without the preference maybe it’s closer to $15m. Then you also have to adjust for the other outstanding preferences. So the common shares (which are likely to be even further diluted before they become marketable) in that case are presently nearly worthless.

Most people do not adequately consider the impact of preferred share preferences, future dilution, taxes, and marketability. These horseman turn a decision which might seem like at first glance to be, “Why give up the chance to participate in a future equity event?” into something more closely resembling a suckers bet.

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

#56

Post by toomuchtodo » Thu, Sep 05, 2019, 6:45 PM UTC

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).

Not everyone knows this at the time, not every company will allow this.

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

#57

Post by chrdlu » Thu, Sep 05, 2019, 7:13 PM UTC

akavi wrote: post #10

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…

My firm helps with number 2!

We help cover the exercise and any associated taxes for a portion of the upside!

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

#58

Post by kasey_junk » Thu, Sep 05, 2019, 7:13 PM UTC

harryh wrote: post #54

strken wrote: post #52

Earlier quoted context omitted.

Would you rather have something worthless at no cost, or buy something worthless because you couldn't estimate the cost and then lose all your money?

Stock grants aren't costless. You have to pay taxes on them (at either the time of grant or time of vest).

Most are setup to have dual triggers so they only vest when they are worth something. Which means the grantee has a lot less cash exposure.

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

#59

Post by gfodor » Thu, Sep 05, 2019, 7:51 PM UTC

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).

Yep file those 83(b)’s, I agree if you fail to do this you’re in a much worse position. If your company doesn’t let you exercise — leave.

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

#60

Post by pianom4n » Thu, Sep 05, 2019, 8:27 PM UTC

If the 409a price is greater than the strike price, of course you exercise. If you don't want to hold it just sell it back to the company.

Also this gets the tax treatment totally wrong. It's not treated as regular income when you exercise, only AMT income. This is a huge difference because the large default AMT credit means that you can exercise a substantial amount without paying taxes.