Very few people have $250K in liquid assets lying around, especially for such a risky venture.
I'll tell you a worse story: your company does allow early vesting so people exercise their options at grant time, long before the vest. This way you avoid the whole taxation problem were the exercising to be happening later.
But guess what? The company does a down round and lays off people, effectively 'buying back' the stock that laid off employees had paid for by 'early exercising' (i.e. the unvested remainder). Since the company buys back the shares at the same price employees bought it at, you think, hey - 'even stevens'? No! Because it's a down round, you're selling something 'above fair market value' (even though it's the price you paid) - and you have to pay taxes!
So consider that: you have to pay taxes on stock that you never properly owned, and never made a dime on!
Ex: you have 10K shares with strike price of 50 cents, vest over 4 years. You exercise them all right away (before vesting) at 50 cents. After 2 years, you get laid off, the company buys back 5K shares at 50 cents. Same price. But since there's a 'down round' the shares are only worth 20 cents each. You now owe taxes for selling 5K of something you bought at 50 cents, sold at 50 cents, but are only worth 20 cents, ergo 30 cents a share 'profit' - that you never realized on shares you never actually owned!
The company in the meantime, bought something at 50 cents only worth 20 cents and gets a tax write off.
The IRS is ballpark neutral, so it's really like the company taking money from employees they just laid off.
Now, the company can issue a ton more shares and wipe out the value of laid off employees equity, and issue new equity to the staff that stayed on to keep the current staff happy.
In terms of % ownership, this has the effect of simply transferring ownership from laid off staff to the current staff + owners.
This happened to me, I'm not sure how common it is, but surely it's not that rare.
I'll tell you a worse story: your company does allow early vesting so people exercise their options at grant time, long before the vest. This way you avoid the whole taxation problem were the exercising to be happening later.
But guess what? The company does a down round and lays off people, effectively 'buying back' the stock that laid off employees had paid for by 'early exercising' (i.e. the unvested remainder). Since the company buys back the shares at the same price employees bought it at, you think, hey - 'even stevens'? No! Because it's a down round, you're selling something 'above fair market value' (even though it's the price you paid) - and you have to pay taxes!
So consider that: you have to pay taxes on stock that you never properly owned, and never made a dime on!
Ex: you have 10K shares with strike price of 50 cents, vest over 4 years. You exercise them all right away (before vesting) at 50 cents. After 2 years, you get laid off, the company buys back 5K shares at 50 cents. Same price. But since there's a 'down round' the shares are only worth 20 cents each. You now owe taxes for selling 5K of something you bought at 50 cents, sold at 50 cents, but are only worth 20 cents, ergo 30 cents a share 'profit' - that you never realized on shares you never actually owned!
The company in the meantime, bought something at 50 cents only worth 20 cents and gets a tax write off.
The IRS is ballpark neutral, so it's really like the company taking money from employees they just laid off.
Now, the company can issue a ton more shares and wipe out the value of laid off employees equity, and issue new equity to the staff that stayed on to keep the current staff happy.
In terms of % ownership, this has the effect of simply transferring ownership from laid off staff to the current staff + owners.
This happened to me, I'm not sure how common it is, but surely it's not that rare.