Ask HN: Planning to leave. How best to handle stock options?

[throwaway68080]

(I'm sure this has been asked before, but I must be bad at search, because I couldn't find the advice I was looking for).

I'm planning to leave the company I joined about 7 years ago as one of the first dozen or so employees. I have some options that are worth $X,000,000 as of the last tender offer, and would cost $X0,000 to buy. Exercising them isn't a problem, but I doubt I could handle the taxes. The company itself was valued in the $500M-$1B range in the last funding round. I'd hate to leave the options behind, but even if I could afford them, that's a ton of money to put at risk.

Does anyone have any experience with ESOfund? I've also heard that there are other private groups who help fund employee option purchases and taxes, but I don't know much about them or even whether it'd work with my employer. Besides those, any other advice on what the best things to do are here?

[not_that_noob]

In your situation, the company holds most of the cards, including if you are allowed to sell your shares to another party. I would talk with an attorney to see how your share docs are structured, and then explore how to work with the company to get value for your shares. For example, they might let you sell to an investor who really wants in. Keep in mind that the funding round valuation is somewhat irrelevant to you, as that was derived from the price of preferred shares, which have more privileges than your (likely) common shares.

The company will be motivated to do the right thing by you, to avoid litigation and spooking current and prospective employees. You might not get all the value you might have hoped for, but likely most.

[hueving]

>including if you are allowed to sell your shares to another party

How does this work with right of first refusal?

[OliverJones]

It's possible your options expire 90 days after you leave the company's employment, or some such thing. I suspect that's the case. It doesn't make sense to just walk away from those options, though.

Ask the company's CFO or somebody if there's any way they can buy back some of your shares at or near market price. If they can do this, or if they can let you sell them to a third party, you can sell enough shares to raise the cash to cover your tax liability and hang on to the rest.

Or, maybe the company can grant you an exception to the "exercise it or lose it" rule that kicks in when you leave. You won't know unless you ask.

You have some leverage. With the number of shares you have, they'll probably need you to cooperate in any transaction they carry out.

ESOFund is a possibility. But your company has to be a participant. And, they grab some of the upside and a lot of the downside.

At any rate, you probably should get yourself a decent tax accountant (or maybe lawyer) to help you navigate this. It's worth paying for top-drawer advice. That person will know how to recommend an honest EOFund-like broker if that's the route you go.

(Congratulations in advance, by the way!)

[kevinpet]

To clarify, if you find a buyer who is interested in buying (would need to be a qualified investor), the company can exercise their right of first refusal to buy the shares from you at that price, but they cannot generally prevent you from selling. If I were in your shoes, I would probably want to have the deal lined up ahead of time before exercising.

Consider going through the CFO or CEO to see if any of the company's existing investors would be interested in acquiring some of your stock. This has the advantage to the company of not bringing in an unknown outsider.

Edit: I see further down that some companies have further restrictions beyond right of first refusal. I'd never heard of that before, but then, I'm only on my first startup where I think my options are worth anything.

[stockaway]

I approached ESOfund in the past, and did not ultimately use them, but not by any fault of theirs. They were very professional, helpful, and knowledgeable about my options and provided very good information about my available choices, even ones that wouldn't benefit them (I did extensive independent research on the decisions available and on their suggestions).

I believe their mission statement is to take the risk for you, which includes AMT if necessary, in exchange for some percentage of your stock to be negotiated. There's no risk in reaching out.

As far as AMT, I believe (off-hand) it's 18% of all income if it would be greater than your existing tax burden. So if you make $100,000 and are currently taxed 30%, your current tax is $30,000. If you exercise stock (where the gain is difference between your equity plan and the value as of the latest 409A, multiplied by the number of options exercised), that counts against AMT.

In this case, $18,000 would be your normal income against AMT, and you could gain another $12,000 in AMT without paying any more. This means gaining approximately $66,000 in value from the exercise without paying additional taxes. You would pay 18% on the rest of the value gain. For another $1,000,000, you'd pay on the order of $180,000.

Note: talk to someone who does this professionally, perhaps a tax attorney, as my word is from memory based on my research from a while ago.

If you believe in your company, or at least believe the stock will be liquid, I absolutely recommend finding a way to exercise your stock. All the better if you don't take a tax burden.

I also found out there's some kind of tax thing where you can preemptively exercise options (at grant time?) which won't be taxed as a gain because the value hasn't changed, then you just get the options as they vest (though it's a little late for that now :P)

[ryan-c]

Federal AMT is 26-28% plus 7% for California AMT.

[js2]

some kind of tax thing where you can preemptively exercise options (at grant time?)

The 83(b) election?

[aguynamedben]

I've done this before. Don't underestimate the opportunities that talking with the CEO (and board members) about your situation may present, especially if you're on good terms with the company, have dutifully served for 7 years, and it makes sense for you to move on. Existing friendly investors in the company may be interested in owning more stock in the company and may purchase your stock in a transaction the CEO is okay with. You could explain the tax liability and that you've served dutifully for 7 years, and potentially exercise and sell enough of your options so that you have enough cash on hand to cover the tax liability for your further exercise.

This is all in an ideal situation. How you communicate and play your cards with the CEO will matter a lot.

[overdrivetg]

Also been there, done that. The other company ask if you have the relationship would be to extend your option period out for a bunch of years - see Pinterest as a precedent (7 years) [1]

Start with whatever executive you have the best relationship with (ideally CEO/CFO). It may be hard though since this tends to require board approval. Oh yeah - you also don't get any cash out today either, but you don't have to track down and negotiate a private sale or deal with taxes, plus you get to keep any further upside if/when the company does eventually become liquid.

The other benefit to the company with option extension is that you won't be on their cap table anytime soon - generally fewer shareholders == better for them too (pre-IPO).

Your options would have to convert from ISO into NQSO, but you shouldn't really care about that since at least you get to keep them.

Lots of nuances to any option (heh) and an accountant / tax attorney should be a no-brainer for you. Since you can't PM me and the HN guidelines don't prohibit referrals, my CPA easily more than paid for himself on my transaction: [2]

Good luck, and congrats!

[1] http://www.businessinsider.com/pinterest-will-let-employees-...

[2] Kevin Rice at www.altumpartners.com

[austenallred]

I know this isn't the advice you're looking for, but since at least $X00,000 (and most likely $X,000,000) is at stake you should definitely talk to a lawyer.

[beefhash]

It may not be the advice OP is looking for, but it's the advice OP needs.

[blizkreeg]

How does one go about looking for a lawyer for such a thing?

[steven2012]

At this point, if there is no way to sell those shares that you exercise immediately, it makes the most sense to bide your time (EDIT: ie. not leave) and wait for the IPO. It might be 1-2 years, but if it means giving up a millions of dollars, I would just tough it out. Don't think that these opportunities come all the time, this is your chance to make a lifetime's worth of money, you hit the lottery so don't squander this opportunity. 1-2 years more won't be a big deal in the grand scheme of things.

[leroy_masochist]

Right, but this person's problem is that they don't have the cash to pay for the taxes associated with exercising the options, making the "hold patiently" plan problematic.

[mcfunley]

I was in a similar situation two years ago. I'd advise having both a plan and a backup plan before you pull the trigger on leaving.

This is generally pretty good, if verbose:

https://github.com/jlevy/og-equity-compensation

Talk to esofund and friends ahead of time, and see what their offers for your company's stock are, and make sure they're acceptable to you if you think you'll have to go that route.

Don't count on definitely being able to sell the stock to finance the taxes. I left after seven years in very good standing (I believed) but when I went to sell the deal was shut down [1]. Luckily I had a backup plan and I was ok [2].

[1] Had a handshake deal with an investor in the company, then the investor went silent on me. When I followed up he said the deal was "just much too small." I reached out to the company for help, and they said they'd actually told him not to buy from me. I never would have known if they hadn't decided to tell me for some reason. The takeaway is that the markets for private company stock tend to be small, and the buyers care more about their relationships with the company than they do about having your shares. Even if the stock terms allow them to buy, and they might not.

[2] However I was trying to sell for roughly double the current (public market) price. The private/public valuation gap is real! Don't put too much stock (haha) in the value at the last tender offer. If you can sell privately at close to that price it's possibly smart.

[Sikul]

With regards to [2], are you saying the private price at the last tender offer was much higher than the current public price?

[angersock]

I reached out to the company for help, and they said they'd actually told him not to buy from me.

See, it's shit like this that further erodes any faith I have in the ponziconomy of startupcanistan.

[toomuchtodo]

http://web.mit.edu/tytso/www/OPTIONS-HOWTO/OPTIONS-HOWTO.htm...

https://news.ycombinator.com/item?id=2623777

https://news.ycombinator.com/item?id=10020063

https://blog.wealthfront.com/stock-options-14-crucial-questi...

[jayzalowitz]

At the very least, wait till Jan 1. That gives you an entire year for the stock to become liquid / sell.

[ryan-c]

More than a year - the tax won't be due until April 15th of the following year. This will give you time to hold the stock for a year (getting long term capital gains rates when you sell).

Really though, talk to a CPA.

[jerf]

Uh, that's a terrible idea. Don't exercise any options you don't have a plan right now for covering the taxes, especially if we're talking about millions as the OP says.

[zippy]

I would call the IRS up and ask them what a payment plan would be like for an n million dollar liability, and then weigh whether that scenario is worth the exercise. Because at this point, this is a question of risk tolerance, and risk vs reward.

For some people, a lifetime of debt, no matter what the possible reward, is unbearable, whatever the odds of the outcome. For others, who feel this is their best shot at wealth, and who are comfortable with the risk, it's an easy choice to buy the options.

But yes, get a tax advisor who is familiar with this specific situation (exercising stock in whatever state/country you live in, e.g California) and find out what the various scenarios are.

Anecdote: I and co-workers of mine have been in this scenario. It worked out for some and was a burden for others. Good luck!

[payne92]

First, talk with a lawyer and an accountant. The at-stake amounts are large enough that's short money.

Second, I'd strongly consider doing some/all of this after Jan 1. That will put your ISO+AMT tax into 2016, which will push your tax bill on this transaction to April 2017. (It may make sense to do a smaller amount before year end, depending on your current AMT situation).

(And make sure you make estimated payments (plus withholding) for 2016 that exceed 110% of your 2015 bill -- that way, you can kick the final bill all the way to April 2017).

Finally, the penalty for paying late is not THAT bad: given the amount of money, it may make sense to file in April 2017, pay what you can, and work out a payment plan with the IRS. You are not the first to have this scenario happen.

[voxy_dale]

I did this exact thing last year, so a couple of things to be aware of. Firstly, many companies will not allow you to sell the shares to another party without their permission. You can talk to them about this but realistically, unless they generally allow this, they are unlikely to make an exception for you since it sets a precedent within the company, but you can try. Might be good to talk to a lawyer about this. Secondly, by exercising you will very probably expose yourself to Alternative Minimum Tax (AMT). If you don't know what this is, look it up as this can be VERY expensive. So, before doing any of this I would really talk to an accountant and possibly to a lawyer.

[vessenes]

On the flip side of this, it's very unlikely that the agreement bars you from _talking_ to the other shareholders about buying you out.

The employee does have some leverage here, to wit, he/she can just ask corporate to make an offer, and if the offer isn't appealing, can canvas all existing investors and say the shares are going to the highest bidder. Someone will buy them, whether the company, to get the headache dealt with, or an investor who's happy to add some common at a nice price.

Whatever the ROFR says, corporate legal will think many times before going toe-to-toe with a recent large investor who wants to buy some more stock.

[ksenzee]

As you say, one possibility is to exercise your options, then sell the shares on the secondary market before IPO. It's worth at least talking to a company like Sharespost about whether those shares would be salable. They can give you an idea of what other employees have sold their pre-IPO shares for, and whether your employer allowed the sale.

I also second the advice about at least waiting until January 1, so you have another year to let the stock mature.

And if ever there were a time to talk to a tax accountant, that time is now.

[zinssmeister]

You can exercise a portion rather than your entire batch of options.

You can possibly arrange with the IRS to pay your tax bill over time.

You can find a buyer that will allow you to sell right after exercise.

[erichurkman]

Do you happen to be at one of the companies that will turn your vested shares into an NSO for 2 - 7 years? For example, Pinterest [0] quite famously started to offer in the last year.

[0] http://www.businessinsider.com/pinterest-stock-options-7-yea...

[phillytom]

Note there are other firms that are in this space as well - Akkadian Ventures, Founders Circle, 137 Ventures, and VSL. That said, I can't speak from experience on any of them.

Having the CEO (and the board) in your corner on this will make the likliehood of a good outcome for you better.

[gesman]

Certainly the risk of $X0,000 is here.

"Valued" has no meaning unless the company is publicly traded or there is a qualified exit.

There must be a marketplace to "sell" tax bills for a chunk of options?

[carbocation]

The risk of 0.28•$X,000,000 is there due to alternative minimum tax rules, which is much worse and more immediate than what might happen to the $X0,000.

[eloisant]

I'd say don't exercise them if you're not prepared to lose all the money you put in.

Calculate the expected gain in the best base to see if it's worth taking the risk. If there's a chance you become a millionnaire if the company does well, then maybe it's worth the risk. If at best you can do a x2, maybe not.

I've seen tons on company ending up on a low-ball exit (i.e. sold for less than what was invested) and see all common stocks nullified so the investors can recoup some of their loss.

[jeffmould]

I am neither an accountant or lawyer, but this may help:

https://blog.wealthfront.com/exercise-stock-options-taxes/

I can't speak for ESOFund, or similar companies, as I have never used them. My best recommendation would be to talk to a tax accountant and explore your options. You may also consider a secondary market sale now if you are allowed by your company.

[gyardley]

No experience with ESOfund, but I've worked with brokers before to sell some of my illiquid, private company stock on the secondary market. It really depends on what restrictions have been placed on your stock. If you can sell some of your stock to cover your tax obligations, that's a decent way to go.

E-mail me if you want, I'm happy to chat about the situation / introduce you to the brokers I worked with.