
Ask HN: Need advice on startup options - optionadvice
About 2 years ago I co-founded a company. For various reasons, earlier this year, my co-founder and I parted ways and came to an agreement that I would take a partial cash buyout and a percentage of the company as stock options.<p>According to our agreement, I was granted 166,667 stock options (3%) at a strike price of $0.089&#x2F;share. The company at that date was valued at roughly $2,000,000. The board granted me a 10 year exercise window.<p>Fast forward to today. The company continues to grow around 20% month over month and just raised a nice Series A, with a post-money around $40m.<p>Did I screw up by not exercising the options earlier this year? Am I making the right choice by sitting on these?  What should I do in this scenario? I honestly have no idea what the smart move here is. I have just enough liquid cash to purchase the options now, but my understanding is that I&#x27;d be taxed on the current value, which I guess would be somewhere around $1m, meaning I&#x27;d owe the government hundreds of thousands of dollars right?<p>Any advice on what I should do is much appreciated!
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adrianmacneil
> Did I screw up by not exercising the options earlier this year?

Not really. At the time it was obviously more of a gamble, so it may have been
a smart move to keep your money in the bank.

> my understanding is that I'd be taxed on the current value

Correct. So assuming that the FMV of the company for your common stock is
about 1/3 of the 40M, and you acquired 3% of that, the government now thinks
you just made (40M*0.03/3) = $400k, and they will expect you to pay tax on
that as income or AMT in your 2015 return.

So unless you have a few hundred thousand dollars lying around, it's too late,
don't worry about it. You still have another 9 years to wait around and see
whether the company makes it big time, at which point paying tax will be the
least of your worries.

~~~
optionadvice
Good point... I guess it's either lose $20k 9 months ago for possibly no
money, or makes slightly less millions later with no risk.

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adrianmacneil
Yup. Also, without knowing anything about the company, it was probably the
right call not to exercise anyway. With a 10 year window, there is not really
any incentive to exercise early, since the startup could fail for many reasons
(unless you are fairly confident the company will be a massive success, in
which case I guess you wouldn't have left :).

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jzila
Sam Altman talked about this in his Employee Equity post:
[http://blog.samaltman.com/employee-
equity](http://blog.samaltman.com/employee-equity). "The idea is to grant
options that are exercisable for 10 years from the grant date, which should
cover nearly all cases (i.e. the company will probably either go public, get
acquired, or die in that time frame, and so either the employee will have the
liquidity to exercise or it won’t matter.)"

Of course, that isn't advice specific to your situation, but at least it shows
you a general direction you can use to guide your thinking. There are also
plenty of resources online that talk about the potential tax consequences of
various exit scenarios.

~~~
optionadvice
Thanks for the link! Reading now

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declan
Are all your options vested? Did the company retain the right to repurchase?*
Why exercise the options now? Can you afford to lose that cash if you the
shares become worthless post-exercise? Can you sell or transfer your options
or pledge as collateral to a loan?

IMHO you should seek advice from a lawyer specializing in this area (who is
also familiar with the tax implications).

* Lawyers often tell founders something like: "Typically, the Company retains a right to repurchase unvested shares at cost upon termination of employment. During the period that the shareholder continues to be employed or otherwise provide services, the repurchase right expires according to a vesting schedule."

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optionadvice
All options are vested. Not entirely sure. I could have afforded if I had
purchased them earlier this year, but the tax consequence of buying them now
is impossible it seems (everyone is saying that without an 83b and purchasing
them earlier this year, I basically would have to pay the tax on the full
value now). I will reach out to a lawyer soon. Figured HN would have plenty of
people who had been there before and willing to give some brief advice/info.

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loumf
One thing to ask an accountant about:

The Series A price might not be the one to use. They paid for a different
class of stock than you have, with probably a lot more privileges and
therefore a higher price. You might be able to base your valuation on whatever
the internal company valuation is (probably being done by the company to set
future strike prices) -- especially if what you have is an option on common.

Even so, I would personally not exercise (I am not an accountant) because 10
years is probably enough of a window.

~~~
lostdog
Right, the funded valuation is different from the valuation the IRS cares
about, the Fair Market Valuation (FMV) or 409a. The amount of AMT you owe is
determined by the FMV, which probably hasn't risen much if at all, so you may
still be able to spend only the cost of the shares.

That said, $15k is a lot to throw at something that will probably fall apart
in the next 9 years.

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mallyvai
Hey - founder of [http://offerletter.io](http://offerletter.io) here - some
thoughts, in no particular order.

My first thought is, get a lawyer and accountant, immediately.

My second thought is, yes, you kind of screwed up. Generally if you have the
opportunity to early-exercise + 83(b), you should take it if you can afford it
- it's far, far cheaper in virtually every case, especially for the really
early stage.

In terms of forward action, you have a few options:

1) Do a full (or partial) exercise with your own money, pay AMT on the spread

2) Take a loan from someone to help finance the full or partial exercise, let
them offset your risk in the short term.

3) See if someone (probably an investor, or your former co-founder) is willing
to buy your stock back (probably at a discount)

4) Do nothing and see what happens over the next few months/years, and only
take (a potentially much more expensive, but also much more certain) once the
company is reaching some liquidity event (or lack thereof).

Here's a more comprehensive blog post on startup equity:
[http://www.offerletter.io/blog/201412-understanding-and-
nego...](http://www.offerletter.io/blog/201412-understanding-and-negotiating-
your-startup-equity.html#section-iso-early-exercise)

Also, even though they're not "your" lawyers, per se (they are the company's)
you should still reach out to the company's legal team to understand your
options. And if you have a good, open relationship with the cofounder and/or
board, then you have a lot more latitude in terms of next-steps as well - if
they're doing well they can nicely ask an investor in a subsequent round to
give you some liquidity should you desire it.

If you really believe in the company, it may make sense to exercise now and
pay the taxes, but if doing so requires a meaningful portion of your net
worth, you'll have to make sure you understand you're putting a lot of eggs in
one basket. You would basically be going in on an asset that is opaque, and
statistically failure-prone. But if you believe in it, it may be worth it.
Maybe.

Drop me a line [ mallyvai at offerletter dot io ] if I can be helpful here
more specifically too.

No easy solutions - all have tradeoffs - but it's definitely a manageable
situation. Disclaimer: I am not a lawyer or accountant, this is not intended
to be formal legal or tax advice, etc etc.

~~~
optionadvice
Yeah I kind of figured I made a bit of a mistake... It wouldn't have been fun
but I could have afforded to lose $20k earlier this year (buying at strike +
paying tax then). Now, with the value of the company in the tens of millions,
I'd be looking at somewhere around $100,000+ in taxes, which I certainly do
not have :\

I'll reach out to my former partner and legal team. We're all on good terms
and I still give advice, direction to the engineering team when they need it.

Thanks for the input and offer to follow up. This is why I keep coming back to
HN :)

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optionadvice
forgot to mention the grant date was back in January... not sure if that
matters or not

