
Should you buy your stock options when you quit? - nealrs
https://nealshyam.com/advice/2019/09/05/Should-You-Buy-Your-Stock-Options/
======
gfodor
Anecdotes don’t really matter much on this question. What matters is a) what
information do you have at the time you quit b) how much capital do you have
and c) what is your risk tolerance.

Basically it boils down to your prediction if the stock is going to be worth
more than your strike price when it becomes liquid, and if you can tolerate
the loss if you predict so and are wrong. Some scenarios this is a very good
bet: you were early, your strike price is low, the company has had several
valuations well above the strike price, the financials are healthy, and you
can absorb the loss if you are wrong. The magnitude of the upside seems like
it shouldn’t be a factor, if these are true, if you think the risk adjusted
return can beat the market. In most cases where it is sane to exercise your
options you’re expecting a multiple return, not a few points, so it basically
should be irrelevant how much upside there is in absolute terms, once you’ve
determined a full loss is tolerable.

~~~
khuey
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 effective gain is infinite%) you're going to have income
under the AMT regime of 100, and the effective tax rate under the AMT is
around 30%. So you still have to pony up around 1/3rd of the current stock
price in capital. This _severely_ constrains the real multiple return that you
can achieve when exercising into a non-liquid stock and exposes you to
enormous downside risk if those returns do not materialize.

~~~
vincentmarle
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).

~~~
gfodor
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.

------
jefftk
_> 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://triplebyte.com/blog/extending-stock-option-
exercise-...](https://triplebyte.com/blog/extending-stock-option-exercise-
window-guide) [https://zachholman.com/posts/fuck-your-90-day-exercise-
windo...](https://zachholman.com/posts/fuck-your-90-day-exercise-window/)

~~~
jrdngonen
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!).

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

------
imroot
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 to change my mind.

~~~
kingnothing
Can anyone chime in as to how it is legal to remove someone's ownership from a
company like that?

~~~
Blackstone4
Bankruptcy .... when people use the word 'restructuring' it typically refers
to some sort of change in the capital structure/ownership where by equity and
maybe even some of the debt is either wiped out, worthless.

When accepting venture funding, the VC capital will come in as preffered
equity which is similar in some ways to permanent debt with no interest
payments.

------
caseysoftware
The single best source that I've found - short of a CPA familiar with stock -
is David Weekly's book: [https://blog.dweek.ly/introduction-to-stock-options-
startup-...](https://blog.dweek.ly/introduction-to-stock-options-startup-
founder-entrepreneur-employee/)

I was an early employee at Twilio (#25) and much later at Okta. Following his
advice saved me thousands when I early exercised in both cases. My only
complaint is that I didn't find and apply his advice sooner.

The author is right. Most of the time it doesn't make sense to exercise. If
you join early, the strike price will be lower but the risk will be higher aka
the odds are lower. If you join later, the strike price will be higher but the
risk _should_ be lower aka the odds are better.

Regardless, having the liquidity at the right time can be hard, especially if
you're caught in a layoff and don't have savings.

------
zaroth
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
reflect the extreme risk of common shares dilution in an unprofitable venture
with large investor preferences, and you should have a very low exercise price
with little to no AMT unless the company is already well into planning an IPO.

At past companies I saw common stock valuation that matched the funding round
valuation, and you should never be paying that price for common shares. 1/10th
that price is a good rule of thumb.

The second most important factor is that you can’t ever sell shares in a
company that doesn’t have a market for its shares. That vast majority of
companies do not have, and never will have, marketable securities.

The third factor for me would be if the shares are eligible for QSBS Section
1202 treatment (tax free up to $10 million), which ISO options are not, but
NSOs can be but the 5 year holding period starts at the exercise date.

~~~
akchin
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 preferred is at $3.00 per share
and the new 409a is $1.25/share. When you leave this is what will happen \-
You need to pay the company $0.50 * number of options you have \- You have to
pay AMT on (1.25-0.5) * number of shares

With last year's tax law, one good thing is that AMT rules changed, so AMT
might not apply. You should, of course, talk to your accountant/tax
professional for the proper advice :-)

~~~
zaroth
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.

~~~
mavelikara
> 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?

~~~
zaroth
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!

------
akavi
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 at all,
this is a pure win (these services eat into your profits, but some is better
than 0)

3) "I didn’t have enough time"

It's increasingly common for startups to have much more generous time spans
for exercise. The 90 day window is required by law for ISOs, but many
companies now autoconvert at the 90 day mark to NQSOs with much longer time
spans, up to 10 years in some cases (Stripe, Pinterest, and Flexport are
examples). This is something you should ask about before joining a company.

4) "I didn’t think the company would survive"/"I have a low risk tolerance"

These are the only ones that _really_ matter. Like any investment, you gotta
weigh the ROI and risk against your preferences.

~~~
hn_throwaway_99
> This is not true if, like most stock options, yours are ISOs and you don't
> hit AMT.

I think for most folks in tech not hitting AMT with any reasonably sized
option grant worth buying will be extremely rare:

1\. Options vest, usually over a 4 year span, so if one, two, three years go
by at your startup and there _isn 't_ a large difference between your strike
price and the current valuation, well then that's a huge signal you don't want
to buy in any case. 2\. Given your average software developer salary and
average range of options, it takes very little to actually hit AMT.

------
jrdngonen
As the author mentions, these sort of decisions can be very nuanced (thinking
about valuation, dilution, liquidation preference, exit value, etc.).

Happy to help anyone thinking through these situations.

Put together some helpful resources and tools here:
[https://withcompound.com/equity](https://withcompound.com/equity)

Some other useful guides:

[https://www.holloway.com/g/equity-
compensation](https://www.holloway.com/g/equity-compensation)

[https://fortune.com/2016/09/27/the-complete-guide-to-
underst...](https://fortune.com/2016/09/27/the-complete-guide-to-
understanding-equity-compensation-at-tech-companies/)

------
compumike
Two workarounds:

1\. Join a startup pre-Series A where the strike price is minimal because
there hasn't been a priced equity round yet. Early exercise.

2\. Join startups that support Extended Exercise Windows.
[https://github.com/holman/extended-exercise-
windows](https://github.com/holman/extended-exercise-windows)

~~~
sv123
#1 is great for the cash outlay for exercising, but if the company has been
even mildly successful with fundraising rounds then the spread will be
significant and AMT could crush you.

~~~
ablerman
The early exercise avoids the AMT exposure.

------
joeblau
I worked at a company from 2011 - 2013 that gave me the offer to buy out my
options. I'm glad I didn't because that company was going out of business. The
entire executive leadership team was swapped out 3 times over the course of 6
months by the board and we were getting crushed by competition. It was only a
couple thousand dollars but I would have just lost it. The answer to this
really depends on your situation and a lot of the points touched on in the
post.

------
denton-scratch
This is a question of risk-appetite. I'm with the OP (I think); I like safety.
Age is a factor (I'm no spring chicken, and anyway I can't wait that long for
stuff to mature).

But I've also throughout my career aspired to be a skilled tradesman; I've
tried to do a productive job well, rather than to try to lever myself up on
the skills of others.

It hasn't made me rich (surprise!), but I'm happier than at least some of my
colleagues who chose the more-enriching path.

------
thorwasdfasdf
I worked at a startup for 5 years. the company recently had been valued at
700Million but only had 1 secondary offer, where I sold as much stock as they
would let me (15% ~ worth roughly 6k pretaxes).

And when I left I had more stock options than anyone else there. But, the fact
that they didn't have more liquidity events and the fact that I couldnt sell
more of my stock, is kinda of a red flag. If no one else in the market wants
the investment (no liquidity events), it's usually a bad sign. It was a pretty
easy decision to not buy the rest of it. I think most of my coworkers bought
theirs. Of course, it turned out they were all worthless.

------
rb808
Also remember in these situations its usually not all or nothing. You can buy
half your options, or just a fraction. That makes the choice less stressful.

------
Blackstone4
Stock options are often for common stock and if its in a VC backed company,
the VC's will invest in the form of preffered equity which is like permanent
debt with no interest payments. If the company is sold for 20% less than the
last round, the VCs will be paid first and the common equity gets what is left
over which could be 20%, 50%, 100% lower than what you thought you might get.
So be careful....

------
pianom4n
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.

------
cik
As usual, Slate Money had a _stellar_ podcast segment about exactly this two
weeks ago. I recommend having a listen.

[https://slate.com/podcasts/slate-money/2019/08/slate-
money-a...](https://slate.com/podcasts/slate-money/2019/08/slate-money-
answers-your-questions)

------
yalogin
If you are at a startup and decide to leave doesn't that also mean that you
don't believe in the company anymore? I understand that there are always cases
like better position or other personal issues that make people move but for
the most part the original statement holds true. So you don't buy out the
stock options and move on.

~~~
JumpCrisscross
> _If you are at a startup and decide to leave doesn 't that also mean that
> you don't believe in the company anymore?_

No. Companies that are terrible workplaces can be great investments and vice
versa.

------
agrippanux
Short answer, from experience: unless the company is on a clear track to a
liquidation event, no.

That said I bought half the options of my last company because the strike
price -> FMV was great enough to take the risk. However I consider that a
gamble equal to rolling pass line in Vegas, and I didn't make the bet with
money I needed to live on.

------
whymsicalburito
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?

~~~
harryh
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.

~~~
pianom4n
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.

~~~
harryh
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.

~~~
pianom4n
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).

------
m4gw4s
Is there a way to set a reminder to read it again when one of those companies
exits/wraps up?

------
MK_Dev
"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.

------
jpm_sd
TL;DR: No. (Betteridge's Law-compliant!)

Which matches my experience. Think about why you're leaving - probably for
reasons which might help predict the company's future.

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

------
nraynaud
funny, I have actual full shares of an old company I used to work for (got the
shares at a discount instead of options), but I'm still waiting for the phone
call telling me I'm rich.

------
draw_down
I wish this would get discussed in the context of options that actually would
be worth something, just once. Seems like a much easier decision when you’re
talking about a company that hasn’t experienced much interesting growth and is
likely not going anywhere.

------
jiveturkey
blah blah blah another yawner ... we all know where this is headed and it's
cut and dried math.

wait wait, no there are some valuable insights here:

> You make decisions based on what you know, not by looking at a crystal ball.

> I didn’t want to look back. [...] To me, the possibility of missing out on a
> big payday wasn’t worth the cost to my psyche.

