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Comment by jessepollak | Hacker News Reader

Thanks for the feedback! We just realized this document is actually out of date with our legal contracts.

I've opened up a PR with the change here (https://github.com/clef/handbook/pull/56), though it may be 10 years rather than 7, so I'm waiting for confirmation from our CEO before merging :)

EDIT: Our CEO's response was: "this is more complicated than just changing that number, give me some time to write the fully change up." Incoming!

EDIT #2: Updated with the 7 year number and a more depth explanation :) - thanks @brennenHN!

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Just to say this directly: You guys laying this out transparent to your team (and policies in favor of your team) is an amazing and impressive thing.

Personally i also believe it's a huge marketing/hiring benefit.

Startups live of implicit trust of their employees (imo their core asset)

Larger companies require explicit agreements with them

Very often when startups become larger companies, this trust breaks.

Having those explicit agreements upfront & transparent (before even joining a company) increases this trust a lot.

Kudos for doing so

Thanks Andreas! I know this isn't necessarily a "product," but thoughts on putting it on PH?

i dont make those calls (community & community moderators do)

but from my pov: doesnt really make sense as content on PH

it's more comparable to an really awesome blogpost

HN is by far the better place for it

If I understand the rules correctly, an ISO that is exercised more than 90 days after leaving a job is treated as an NSO, which means that it will be taxed at regular income tax rates instead of having the ability to be taxed at long-term cap gains rate. (This could reduce their value by an additional 15%+.)

That said, it's irrelevant if you exercise and sell an ISO at the same time, because short-term cap gains are taxed as income tax, too.

The real interesting term is having the ability to early exercise your entire stock grant, before it vests and before there is a spread between its strike price and fair market value. (The company would have a repurchase right, to implement the vesting schedule.) That way the cost is very low, and there's no worry of having to exercise in the future when it could be taxed unfavorably, and the clock for long-term capital gains starts early.

It should be noted - an option containing an early exercise attribute is typically rare for common option holders and usually only reserved for management. I.e. most people with a typical amount of options (~5,000) would typically not have this ability.

Less true now. It's $1-3k/employee for the company to deal with it, but a lot of companies include ee, even up to the point where they switch to RSUs.

If there's a repurchase agreement that allows the company to buy back the stock for less than market value (and presumably accompanying transfer limitations) I wonder if the IRS would take the position that it is income only after the repurchase agreement expires at the FMV at that point in time.

The way it works for founders is that you get actual stock, and vesting is implemented with a repurchase right. The IRS considers the stock to be an "asset at risk", meaning that you don't actually realize the value as income until the repurchase right goes away. Because this happens over time, it practically means founder stock is, by default, treated as being earned every month. This is no big deal in the beginning, but if you change the valuation of the company, suddenly each monthly stock grant has a discrepancy between what you paid for it and what it's worth. Therefore, it's income, therefore, you owe taxes on it.

The way to fix this is an 83(b) election, which lets you say, "No, I'm taking the risk of this all up front. I want to pay taxes on it, even though the asset is at risk." In this specific case, it's a no-brainer: there are no taxes today, so of course I'll pay that $0.

If you want to do this with employee options, you have to set up early exercise rights. I think early exercise is done via 83(b) for employees, but I'm not 100% on that. My company isn't big enough that we've had to cross that bridge :)

> If you want to do this with employee options, you have to set up early exercise rights. I think early exercise is done via 83(b) for employees, but I'm not 100% on that.

Yes, if you early exercise ISOs, you would want to file an 83(b) to pay the $0 ordinary income tax burden up front (and get long term capital gains later). I'm not sure if you can file an 83(b) on an NSO.

It sounds like an incredibly complicated process to get to "These options are no longer options, they are stock with basis zero"; Am I correct?

It's a little complicated, but it can be very helpful. The basis isn't zero either, it's what you paid to exercise the option. The tax due at time of exercise is $0 because the fair market value is the same as what you paid (assuming you exercise either at the time of the grant, or at least before the next evaluation of the FMV). The benefit is if/when you sell, if you've held everything for the right period, you can pay long term capital gains tax on the gain, instead of ordinary income like you would if you held onto the option as an option.

Yes, you can file an 83(b) when early exercising NSOs. In fact, some lawyers may advise you to take NSOs over ISOs for the portion of the grant you early exercise.

Is $0 legal? I thought normally you gave the stock 1 billionth of a penny of value and paid your $1 in tax.

It's legal, not because the stock has no value, but because the spread (i.e. the difference) between the strike price of the option (e.g. $0.01/option) and the stock's value (e.g. $0.01/share) is $0. That's the profit, so that's what you pay tax on.

Many people would prefer the NSO since they don't lose out on vested shares upon departure (or get saddled with a massive tax bill). If you have a good chunk of equity, the outcome can be pretty binary: worth something substantial or basically nothing, in which case the slightly higher tax isn't nearly as important as actually getting a piece.

\o/

You should definitely soak up some credit for having that term. :)

And for how it played out! I'm sure that this wasn't what happened but it does occur to me that this pattern makes for a pretty good HN-hack by leveraging HN negativity/cynicism and then swooping in with an "oops - it's actually exactly what everyone thought it should be!". Definitely more net attention this way than would have been if it had just read this way originally.

Wasn't intentional, but I like your thinking :P

I just love how a term that has so much material impact for so many people swung from Not Great to Industry-Leading Excellent . . . from a HN comment, to a PR, and merged . . . in a couple of hours.

I don't think the actual term changed, just the documentation.

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