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

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

#61

Post by pianom4n » Thu, Sep 05, 2019, 8:31 PM UTC

harryh wrote: post #39

whymsicalburito wrote: post #36

Are there tax benefits to exercising early? Hypothetically say I have some options with a pretty cheap exercise price, and I think the company will be taking on PE money in the near future, AND I have faith that the company will successfully exit in the future, will exercising early save me some taxes?

Yes. If you can exercise at a low price then all of your gains after that will be taxed at capital gains rates instead of ordinary income rates. Note that if you just started you can likely "early exercise" all of your options right now by filing an 83B and paying the company the strike price. You generally have 90 days from the date of the option grant to do this.

This is just wrong. You pay capital gains, not ordinary income, tax regardless if you exercise early or not.

The only benefit to exercising early is to avoid the AMT impact.

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

#62

Post by mavelikara » Thu, Sep 05, 2019, 9:18 PM UTC

zaroth wrote: post #55

akchin wrote: post #50

Earlier quoted context omitted.

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…

> 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.

Anecdata, but I have seen this too.

Can someone knowledgable founder here please chime in on why companies do this? Does the higher common price help the company boost its compensation packages to match those from AmaGoogFaceSoft who give publicly traded stock?

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

#63

Post by harryh » Thu, Sep 05, 2019, 9:28 PM UTC

pianom4n wrote: post #61

harryh wrote: post #39

Earlier quoted context omitted.

Yes. If you can exercise at a low price then all of your gains after that will be taxed at capital gains rates instead of ordinary income rates. Note that if you just started you can likely "early exercise" all of your options right now by filing an 83B and paying the company the strike price. You generally have 90 days from the date of the option grant to do this.

This is just wrong. You pay capital gains, not ordinary income, tax regardless if you exercise early or not. The only benefit to exercising early is to avoid the AMT impact.

This is not correct, and I'm not sure why you would think this. In general the way to think about capital gains is that you can't qualify for them unless you have purchased something that then appreciates in value.

So for stock options, you don't start the clock on the long term capital gains rate or set a cost basis for your capital gain until you exercise the option and shell out the cash for the strike price.

There is all kinds of information on the internet about this if you don't believe me.

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

#64

Post by harryh » Thu, Sep 05, 2019, 9:33 PM UTC

kasey_junk wrote: post #58

harryh wrote: post #54

Earlier quoted context omitted.

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.

Oh interesting. I've never actually seen a setup like that.

I will now consider negotiating for something like that if I ever again join a startup. Thx!

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

#65

Post by khuey » Thu, Sep 05, 2019, 9:43 PM UTC

jhallenworld wrote: post #51

compiler-guy wrote: post #21

Earlier quoted context omitted.

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...

Also writing it off just means the government goes in for % of your loss, which is far less than 100%.

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

#66

Post by pianom4n » Thu, Sep 05, 2019, 10:01 PM UTC

harryh wrote: post #63

pianom4n wrote: post #61

Earlier quoted context omitted.

This is just wrong. You pay capital gains, not ordinary income, tax regardless if you exercise early or not. The only benefit to exercising early is to avoid the AMT impact.

This is not correct, and I'm not sure why you would think this. In general the way to think about capital gains is that you can't qualify for them unless you have purchased something that then appreciates in value. So for stock options, you don't start the clock on the long term capital gains rate or set a cost basis for your capital gain until you exercise the option and shell out the cash for the strike price. Ther…

I'm talking about incentive stock options (ISO), which is the most common thing to get. Non-statutory stock options (NSO) are entirely different and are not common for normal startup employees.

When you exercise ISOs, you are buying the stock at the strike price. It doesn't matter what the current market price of it is (other than for AMT). The cost basis is the strike price.

The "clock" for determine long-term vs short-term starts when you exercise, but it doesn't affect the cost basis. If you don't hold it long enough the gain may get taxed as short-term or ordinary income (usually no a difference except in a couple of states).

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

#67

Post by monitorman » Thu, Sep 05, 2019, 10:13 PM UTC

jrdngonen wrote: post #31

jefftk wrote: post #28

> 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://tripleb…

Worth noting, even if you have an extended exercise window (i.e 10 years), your ISOs will turn into NSOs after 90 days since your departure (and thus have a different tax treatment!).

In addition, the spread can potentially get larger and larger with time, increasing the tax that you must pay to exercise.

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

#68

Post by kasey_junk » Fri, Sep 06, 2019, 1:38 AM UTC

harryh wrote: post #64

kasey_junk wrote: post #58

Earlier quoted context omitted.

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.

Oh interesting. I've never actually seen a setup like that. I will now consider negotiating for something like that if I ever again join a startup. Thx!

Double trigger RSU vesting is the ‘standard’ now. It’s so much better for employees that I now see the use of options as a big red flag.

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

#69

Post by purplezooey » Fri, Sep 06, 2019, 4:08 AM UTC

Well ask the folks at Cloudera and MapR. Doubt that played out well for many.

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

#70

Post by zaroth » Fri, Sep 06, 2019, 4:24 AM UTC

mavelikara wrote: post #62

zaroth wrote: post #55

Earlier quoted context omitted.

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…

> 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. Anecdata, but I have seen this too. Can someone knowledgable founder here please chime in on why companies do this? Does the higher common price help the company boost its compensation packages to match those from AmaGoogFaceSoft who giv…

Aside from companies just not generally understanding the value of a low common stock valuation? They could mistakenly believe the low common valuation will impact a future funding round.

The value can creep up over time, and then companies try to avoid the perception that the common stock would ever become less valuable, so they also might try to keep it rising.

Or perhaps more dubiously, they could be quoting stock option grants in terms of dollar value of the strike price, and want it to look higher for the same number of shares. In an offer letter, which seems like a larger/better grant; 10,000 options at a $3.80 exercise price, or 10,000 options at a $0.38 exercise price? You will almost never see a percentage value quoted, and I've heard of some companies claiming the total share count is not even public information!