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1. The day you exercise, the IRS will tax you income tax on the value between the stock's current value and your strike price. This is true even though you haven't made money from selling the stock yet.

2. If the company is still private, the stock's value is determined by the last 409(A) valuation for Common stock that the company performed, assuming that your options are for Common stock (which is very likely). The company must perform one of these valuations a year and should provide you with that amount upon your request.

3. Exercising the stock starts the clock for long term capital gains treatement. That is, if you sell the stock a year after exercising it, you will pay capital gains tax on the value difference between the sell price and the value at exercise.

Math wise:

* TP = strike price (the price in your option contract at which you buy the shares)

* EV = value of a share at exercise time, as determined by the latest 409A valuation

* SP = sale price of a share when you sell the stock eventually

* #S = the number of shares you have

* IT% = Your income tax rate

* CT% = Your long term capital gains rate

At exercise:

- You pay to exercise the shares: #S * TP

- You owe in taxes: #S * (EV - TP) * IT%

At sale

- You make: #S * (SP - TP)

- You owe in taxes, assuming you waited a year to sell: #S * (SP - EV) * CT%




Unless I missed something obvious and OP said that s/he has left their company and their options were converted to non-statutory options (NSOs), #1 is not true.

For incentive stock options (ISOs) #1 is not true and the earnings are not taxed as income. However, the earnings generated by your shares ((EV - TP) * #S) will be applied as an adjustment for the purposes of computing your alternative minimum tax (AMT).

Startup employees have ISOs, and are able to exercise them as ISOs until 90 days after they leave.


> Startup employees have ISOs

This is not necessarily true. I am a startup employee and I have NSOs.


Also true here. And was a regular W-2 employee.

In this case it seemed to be the case where one of the founders didn't know the difference when setting things up initially. After series A one of the investors pointed it out and new employees were given ISOs and old employees savvy enough to care were paid off.


You're the first startup employee I've encountered in recent times who doesn't have ISOs. Are you a contractor / consultant who doesn't qualify for ISOs?


To answer both questions in this subthread, I'm a regular W-2 employee. I've been at the company since day 0, and I'm not sure whether all other employees get NSOs or not.

edit: just to make sure I'm not crazy I dug out my option agreement and it's definitely NSO.


The last line I thought about including in my GP post but didn't: "If you're a fulltime employee and you have NSOs, the founders botched the paperwork, plain and simple". As a founder myself, I think that's inexcusable in this day and age.

Condolences. That really sucks. :(


Well, two questions: what about employment at will? And, why would you prefer NSO over ISO?


Are you a 1099 or a W-2?


What happens when after exercising, you sell the shares for a lot lower than the EV the year after? Can you claim a loss and deduct the loss from the taxable income the year you sold?

Is your tax deduction = #S * (EV - SP)?


Tax deduction is #S * (SP - Sale Stock Price).

This is equivalent to the standard: (Cost Basis - Sale Proceeds) calculation in a standard stock transaction.

Depending on whether this is a short term or long term loss, the following happens (taken from [1])

Short-term losses counterbalance those expensive short-term gains. What's left at the end of Part I of Form 8949 is the net short-term capital gain or loss. If there were no gains, then obviously the net would equal the total loss. Long-term losses are applied to long-term gains. The result, at the end of Part II of Form 8949, is the net long-term capital gain or loss. Again, if you only have a loss, then the net is a negative number. Next, you combine the short-term and long-term results on Schedule D. At this point, a loss in one section can offset a gain in the other section. For example, if you have a net short-term loss of $1,000 and a net long-term gain of $1,200, then you'll pay tax on only $200. If there's still a loss, you can deduct up to $3,000 from other income. If you had a really bad year and ended up with a net loss of more than $3,000, you can carry forward the leftover portion to next year's taxes. The unused loss can be applied to next year's gains, as well as up to $3,000 of earned income. A big loss can be used as a deduction indefinitely -- another important reason to keep good records.

[1] http://www.bankrate.com/finance/taxes/capital-losses-can-hel...


Ok so you can deduct as much as you want from any 'capital gains' you might have but only are allowed to deduct a max of $3000 per year from regular income, and the leftover capital loss just keeps on rolling over perpetually until you die?

Also the other thing that's screwed up about this is you pay taxes when you exercise the options at the normal income tax rate. But when you want to apply the tax deduction in the event of a loss, you're only allowed to do it on 'capital gains' for an unlimited amount and a max of $3000 on normal income. In fact it might be preferable to deduct it against normal income and keep rolling it over and just pay normal capital gains taxes (which is much lower than your income tax rate typically).


> and the leftover capital loss just keeps on rolling over perpetually until you die?

Pretty much. I have a $10K capital loss from a bad investment over 10 years ago. I simply keep rolling it forward until I have a capital gain to offset it.


I have a nominal amount of options from the job I just left. The amount of money doesn't sound like it's worth the hassle. Maybe I should just let it expire.


If you were granted ISOs (you were an employee and it is still within 90 days from your departure) and they are still available to you as such, exercise them as long as you're comfortable with the risk.

Despite the parent comment, unrealized earnings on the exercise of ISOs are not taxed as income.


They are not taxed as income but are subject to AMT, so can absolutely leave you with a large tax burden if you aren't cautious.

https://www.nceo.org/articles/stock-options-alternative-mini...


If it's a "token amount", then that's probably unlikely unless you have other large deductions (ex: mortgage, property tax)


It can be quite large too. However, you can recover that money a few $k at a time over the next several years if you are not subject to AMT (and don't sell the shares). Granted you will have to pay the taxes again when you sell the shares, but at that point it's capital gains (15%) so if it's a long term prospect it may well make sense.


You don't have to exercise all of them, just pick an amount that you're comfortable with. Think of it as insurance against "I worked for a company that later became a unicorn and all I got was this lousy t-shirt." How much would you pay for that, if anything?


In regards to #2: Does the company have to provide you with its last valuation? Can they force you to provide your own third party company valuation?


If you sell, they have to provide the value for tax reporting purposes.




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