An Early Engineer's Guide to Early Stock Option Exercise

[CalChris]

There’s no mention of Qualified Small Business Stock, QSBS. If you are early on, this is more important than 83b or early exercise although more difficult to manage.

https://www.andersentax.com/services/for-private-clients/bus...

[j_s]

QSB seems to be circling back into the limelight recently here:

What Is QSB Stock and Why Does It Matter for Startups? | https://news.ycombinator.com/item?id=15495873 (2017Oct;21comments) <- content is 2016Jul grellas

>When you do qualify, the benefit can be up to $2M

Ask HN: How do I minimize the taxes from selling my startup? | https://news.ycombinator.com/item?id=2502623 (2011May;52comments)

>proceeds of the original and the new investment are treated as long term capital gains [...] if the proceeds stay in a QSB for more than 5 years, the whole thing is tax free

Tell HN: 100% exemption for angel investors extended through 2011 | https://news.ycombinator.com/item?id=2018041 (2010Dec;16comments)

>grellas: My two cents ...

[aveshcsingh]

Excellent point, Chris. Founders should consider giving out RSUs instead of options for this reason. My understanding is that stock options do not count as Qualified Small Business Stock, however.

[throwaway2016a]

My problem has always been that startup pay is often below market and when you are already making below market, shelling out $20k to exercise is prohibitive. In my case that would mean spending more money than I put on the down payment of my house or pay for a year of my kid's daycare.

With that said, if you can afford it it is a great way to lesson the tax blow in the event of an exit.

[Clubber]

From what I understand, a banking or trading institution will execute the transaction, leaving you with the net for a moderate fee.

[Lunar_Lamp]

Just to be clear, though I'm sure it won't shock anyone, the article is very US specific and therefore it's entirely likely that parts of the advice will not carry over into other tax jurisdictions. I only comment this as I had assumed it was a more general article than dealing with the tax specific aspects of options.

[aveshcsingh]

That's true. The only part of this post that applies generally is the discussion of golden handcuffs; the rest is specific to US tax law.

[markcerqueira]

Exercise is in the post title and article title. Exercising = taxable event in most places I'm guessing.

[devy]

I went to a workshop hosted by eShares Inc. regarding stock options a few years ago. They've since put it up on their blog. Highly recommended: https://blog.esharesinc.com/equity-101-stock-option-basics/

Btw, if your employer haven't used eShares Inc for cap management, they should. It's much more streamlined with the electronic stock certificates and exercised (no messy paper trials to keep!)

[ellisv]

Former company uses eShares but current one doesn't :(

[thoreauway]

The spreadsheet with formulas is more helpful than I would have imagined (remember to look at the assumed constants tab).

[aveshcsingh]

Glad you found it useful!

[auspex]

80% of startups fail and 20% succeed in some fashion. Which means if you normally make $50,000 and take a $5,000 paycut to work there you will lose $20,000 over the 4 year vesting period in salary.

80% of the time when the startup goes bust you make 0 on equity and still lost money due to the paycut. For a total of 8x20 or $160,000 loss.

The two times you are successful you make 2xEquity.

This means your equity has to be at least worth $80,000 each time you succeed.... just to break even with salary.

Factoring in the risk of your equity being 0 you should be getting a LOT more equity.

It's very similar to calculating expected value in poker.

[creaghpatr]

Really great article. I hope the government repeals the AMT tax as expected in the coming tax cut bill. You are right that there is little material out there for resources.

[ellisv]

Another resource is https://github.com/jlevy/og-equity-compensation (was posted here a couple years ago). It has the benefit of being "open source" so it might be easier to contribute to.

[onewayonly]

Great read- thank you!

[Phanyxx]

I 10/10 thought this was going to be about doing squats at my desk. Sigh.

[ellisv]

Standing desks, treadmill desks, squatting desks, where does it stop?

[4restm]

yup, the article got me too