
Ask HN: Planning to leave. How best to handle stock options? - throwaway68080
(I&#x27;m sure this has been asked before, but I must be bad at search, because I couldn&#x27;t find the advice I was looking for).<p>I&#x27;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&#x27;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&#x27;d hate to leave the options behind, but even if I could afford them, that&#x27;s a ton of money to put at risk.<p>Does anyone have any experience with ESOfund? I&#x27;ve also heard that there are other private groups who help fund employee option purchases and taxes, but I don&#x27;t know much about them or even whether it&#x27;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?

~~~
leroy_masochist
Some companies also have fine print in their equity agreement that employee
equity holders must get the board's approval for any sales of the company's
equity prior to the stock being listed on a public exchange. Employees /
former employees are thereby locked into being equity owners until the company
in question goes public or is acquired.

If you leave the company, you have to exercise the options (typically within
30-60 days), and pay not only the strike price but the AMT on the difference
between the strike price and the latest per-share valuation (i.e., the paper
value of the options). So if you have options at a strike price of $50k that
are now worth $5mm, you're in for well over $1mm of taxes payable -- now -- in
cash.

My understanding is that this practice is legally dubious and has been
challenged, but IANAL.

~~~
gameshot911
Using your example, can you not just subtract the $1M tax from the $5M payout?
If the tax is actually due as a separate transaction before the payout appears
in your bank account, wouldn't it be fairly easy to get a risk-free loan? Sure
it's a lot of money, but isn't it 0 risk for the lender?

~~~
tuckermi
I think the point is that there is same-year tax liability on the $5M value,
but there is no guarantee on getting the $5M payout that same year (or ever,
for that matter). When you exercise your options, you now hold shares in a
private company, which may restrict your ability to realize the payout in
various ways.

~~~
leroy_masochist
Yes, exactly this.

------
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.

~~~
1024core
In such a situation: would it make sense to move to, say, NV and establish
residence there before cashing out? At least you save the 7% CA AMT.

~~~
hueving
Won't work. California IRS hires bloodhounds to sniff this stuff out.

If you were employed in California when you were granted the options, you are
going to pay CA taxes on them during exercise.

~~~
x0x0
I'm pretty sure that's not true.

It is true that you can't just rent an apartment in seattle, call it a day,
and pay no income tax. CA will look closely at things like owning in CA, where
bank accounts are, how many days you spend where (keep airline receipts),
where you're registered to vote, where your kids/spouse live and attend
school, etc. But it is possible to establish residency in a state tax haven
and avoid that 12.3% CA income tax.

As always, if the amount of money is material, see a tax attorney.

~~~
hueving
No, when it comes to options, it's where you were a resident when they were
given to you.

~~~
x0x0
Oh, apparently for NSOs. That is not true for ISOs, which the vast majority of
startup employees will be granted. see Publication 1004 from the CA Franchise
Tax Board, discussing ISOs [1]

    
    
       Nonresident of California on Date of Stock Sale
       Qualifying Disposition
       If you exercise an incentive stock option while a California resident or a 
       nonresident and later sell the stock in a qualifying disposition while a 
       nonresident, the income is characterized as income from the sale or 
       disposition of intangible personal property having a source in your state of 
       residence at the time you sold the stock. Accordingly, you are not subject 
       to income tax by California even though the services that gave rise to the 
       grant may have been performed in this state. [pg 10]
    
    

[1] www.ftb.ca.gov/forms/misc/1004.pdf

~~~
hueving
This covers the stock sale, but what about the liability of taxes from the
exercise (diff between strike price and current value)?

~~~
x0x0
For ISOs, you're only subject to AMT on the spread between fmv and strike
price at exercise. However, since there is (I think by law?) a 90-day exercise
window after leaving employment, there's only 2 circumstances: (1) exercise
while employed, and (2) exercise w/in 90 days after leaving employment. In
both cases you're almost certain to be a resident of the state in which you
were employed. Nothing I know of would require you to pay AMT to the state in
which you were granted the options you exercised, but because it's unlikely
for you to be a resident of a different state, it's a less interesting
question.

Also, if your company takes off like a rocket, it's very much in your interest
to not procrastinate on exercising vested options, because you want to
minimize the AMT-taxed spread between FMV and strike. That increases the
likelihood you're a resident of the state in which you were employed when you
exercise.

------
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-...](http://www.businessinsider.com/pinterest-will-let-employees-
exercise-options-for-seven-years-after-leaving-2015-3)

[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.

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

~~~
mmastrac
Ask for recommendations from friends. Ask for a recommendation from your
accountant. If that fails, call up a startup-specialized lawyer and ask them
for advice or to be referred to someone they trust.

------
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.

~~~
bagels
I think the proposal is that the person not leave, instead of leaving and
needing to exercise.

------
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](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?

~~~
mcfunley
Both the price of the final pre-IPO tender and the sale price I privately
arranged were higher than the current public market price.

------
toomuchtodo
[http://web.mit.edu/tytso/www/OPTIONS-HOWTO/OPTIONS-
HOWTO.htm...](http://web.mit.edu/tytso/www/OPTIONS-HOWTO/OPTIONS-HOWTO.html)

[https://news.ycombinator.com/item?id=2623777](https://news.ycombinator.com/item?id=2623777)

[https://news.ycombinator.com/item?id=10020063](https://news.ycombinator.com/item?id=10020063)

[https://blog.wealthfront.com/stock-options-14-crucial-
questi...](https://blog.wealthfront.com/stock-options-14-crucial-questions/)

------
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.

~~~
ericwaller
That's actually not the case, estimated tax is due quarterly (ex. for income
in Q1 of 2016 for which your employer doesn't withhold taxes, you have to pay
estimated tax by April 15, 2016).

But yeah, definitely talk to a CPA.

~~~
ryan-c
It looks like if you have at least 110% your previous year's tax withheld and
don't have self employment income you do not need to pay quarterly taxes.

[https://turbotax.intuit.com/tax-tools/tax-tips/Small-
Busines...](https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-
Taxes/Estimated-Taxes--Common-Questions/INF12056.html)

I can't find the actual IRS publication that says this, though.

------
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.

~~~
pc86
You are usually not legally allowed to sell stock from exercised options to
anyone without explicit permission from the company. It has nothing to do with
ROFR.

~~~
vessenes
But, you miss my point. If Peter Thiel wants to buy your shares and holds N%
of the existing company, that deal will get done, regardless of the company's
legal rights. It's social.

------
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...](http://www.businessinsider.com/pinterest-stock-
options-7-years-golden-handcuffs-2015-4)

------
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/](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.

------
danbmil99
Did you do an 83b election? If so, the tax liability may be somewhat lower
(capital gain instead of ordinary income).

Two words for anyone joining a startup as an early employee or founder: early
exercise.

------
rpedela
Public or private company? Are you able to sell the shares immediately after
exercising the options?

------
sjg007
Are they ISOs or NSOs? If ISOs and you buy in first 30 days then you pay no
taxes until you sell (and hold for 2 years from grant date, 1 year after
exercise). But check that with an accountant or tax person. If NSOs then you
have to pay tax on the gain.

------
epynonymous
you'll still take home a large payout even after taxes have been deducted, i
would not worry about that, would be more worried about when/if the company
either goes public or gets acquired.

~~~
carbocation
> you'll still take home a large payout even after taxes have been deducted, i
> would not worry about that, would be more worried about when/if the company
> either goes public or gets acquired.

But they will be on the hook for an AMT bill in April which will likely be
worth 3-10 years worth of their current annual salary. The tax question is by
far the most important question for this individual. The question of losing
the $X0,000 that they put into the options directly is a rounding error.

~~~
quotha
How could the tax bill be greater than the amount earned?

~~~
fasteddie
OP isn't gaining any money from this. They are excercising their options:
spending $X0,0000 to buy $X,000,000 worth of shares.

After exercising, they now own shares. The difference between the purchase
price and the value of the shares is income, and OP needs to pay taxes on that
income.

Note that OP isn't getting money, they are getting the shares, which they can
hopefully sell in the future, either in an IPO or acquisition (or future
internal round).

If they want to sell the shares to get money (to pay the taxes), there are
tricky rules involved.

------
ranman
Mongodb?

