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Comment by leroy_masochist | Hacker News Reader

Some companies also have fine print in their equity agreement that employee equity holders must get the board's approval for any sales of the company's equity prior to the stock being listed on a public exchange. Employees / former employees are thereby locked into being equity owners until the company in question goes public or is acquired.

If you leave the company, you have to exercise the options (typically within 30-60 days), and pay not only the strike price but the AMT on the difference between the strike price and the latest per-share valuation (i.e., the paper value of the options). So if you have options at a strike price of $50k that are now worth $5mm, you're in for well over $1mm of taxes payable -- now -- in cash.

My understanding is that this practice is legally dubious and has been challenged, but IANAL.

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I am of the opinion this exists to screw "the little guy" - becuase few employees who leave companies have the upfront cash for both options and taxes.

This allows the company in question to effectively keep many shares/options that are given out to employees who were lured into the company with the "you're an equity partner!" line... only unicorns will pay all those little employees for the most part.

2015: HN discovers golden handcuffs are for the employer, not the employee...

Regardless of the snark in your comment, there are many many people who need this spelled out for them.

Very true, but (imo obviously) employees here are generally deluded: your relationship with management and founders of your employer is an inherently adversarial relationship. Pretending otherwise benefits them and screws you.

Yet another thing employees really need spelled out.

All the "we are a family" bs that any company pushes is generally crap.

If you fuckup in your family, you're generally not disowned.

In any company - you mess up and you can be cut...

If you have big enough issues to complain a lot to HR or speak disparagingly about your employer... Then you need to start looking for a new position, silently. HR is not the friend of the employee, mostly.

> All the "we are a family" bs that any company pushes is generally crap.

And don't forget the all-too-common practice of the hiring manager saying (or strongly implying) something to the effect of, "I'm a bit troubled by all the questions you seem to have about compensation, especially with regard to how much your options would be worth if you only worked here for a few years. I really got the impression that you were committed to our mission and a good cultural fit."

Don't blame the companies, blame the government that writes the tax laws. There shouldn't be any taxes due until the shares are sold, and a profit is realized, like a normal everyday stock trade.

I didn't blame anyone. I stated my perception of the issue which informs my opinion... And I'll always be open to the fact I am wrong/naive - but it'd take a lot to convince me I am wrong on this issue after being fucked over by many Silicon Valley companies based on this...

> Don't blame the companies, blame the government that writes the tax laws.

True, but also blame companies when they fail to educate their employees about the mechanics of their equity grant -- or even worse, when they obfuscate in response to direct questions on that subject.

Using your example, can you not just subtract the $1M tax from the $5M payout? If the tax is actually due as a separate transaction before the payout appears in your bank account, wouldn't it be fairly easy to get a risk-free loan? Sure it's a lot of money, but isn't it 0 risk for the lender?

You're missing the problematic part. It's when you've exercised an option that gives you a non-cash, notional ("paper" or "unrealized") gain, and you have to pay taxes on that in cash.

This should really be solved by letting you transfer (or somehow attach) the shares to the IRS at the value they "believe" they are worth in lieu of the tax on those shares. Or better yet get rid of the whole AMT mess entirely.

Isn't the problem that there is no $5MM payout? After paying a few tens of thousands for the below-market-price shares, you're the new owner of some shiny private shares, for which there is probably no market. In the future event of an acquisition or public offering, there's a chance of a payday.

There is no $5mm payout in this scenario. This is the paper value of the shares, which you must pay taxes on since the IRS considers them income. In other words, the IRS thinks you have received something worth $5mm in value, so you must pay taxes on it.

The $5M value is illiquid and speculative (based on startup valuation). In effect, this would make the bank a defacto investor, and most bank lenders are weary of startup stock as collateral. Definitely NOT zero risk!

I think the point is that there is same-year tax liability on the $5M value, but there is no guarantee on getting the $5M payout that same year (or ever, for that matter). When you exercise your options, you now hold shares in a private company, which may restrict your ability to realize the payout in various ways.

Yes, exactly this.

The problem here is the IRS wants its $1 million in cash, but the only way you can turn those shares into cash is to sell them to someone.

If there's no one willing to buy at least $1 million from you, then you can't pay the IRS.

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