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Comment by econner | Hacker News Reader

This advice is often given but it's easier said than done. Let's say you work at a unicorn for 3 years and in that time it goes up 10x in VC fantasy land valuation. On paper you have a lot of money and the company reasonably might go public a couple years after you leave.

Let's say you're granted about a year's salary in shares when you first join so you've vested $100K for a round number. When you leave that equity is worth $1 million. Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man. If the company goes belly up, you lose $100K outright and are stuck with a $200K tax credit that you get back in $3K per year deductions for the rest of your life.

Or, you could have exercised the shares as you vested and paid a bit less in tax with the lower 409A valuation..but you're still maybe looking at a $100K total tax bill.

Do you take the risk or not? Or do you end up locked in for a few more years of handcuffs while waiting it out?

It'd be really hard for me at least to walk away from this situation with nothing..so then I have to value the equity as something. And if I want to treat it as 0 it'd be really tempting to wait a few years and see..which again means the equity is worth something to me.

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"Let's say you're granted about a year's salary in shares..."

Please use correct terminology. You're given options to purchase shares, or you're given shares outright. The former is what most people are accustomed to: options to purchase shares at a discounted price. The latter, know as a "stock grant," does not require the employee to purchase the shares - they've been granted to the employee.

Both of these things tend to come with a vesting schedule: you don't get to buy all your discounted shares when you start working on day 1, nor are granted shares handed to you because you showed up on the first day.

"Granted a year's salary in shares" would mean there's nothing to buy because those shares are yours.

Also note that RSUs and options are taxed differently. When you're issued a block of RSUs, you almost always do a section 83(b) election, declaring the RSUs as ordinary income. When you sell them years later, the difference in value is then taxed at the lower capital gains rate, rather than the income tax rate.

However, this means you take the tax hit when you receive RSUs, unlike options, where you're taxed when you exercise them. This can be good or bad, depending on the value of the shares, the vesting schedule, etc.

The proper way to do this for a non public company is to settle the stock for RSU based on the vesting schedule AND an exit (IPO/acquisition). This way you don't technically own the stock and have to pay taxes until there's liquidity. I believe this is how a lot of the bigger unicorns are issuing RSUs now.

http://avc.com/2010/11/employee-equity-restricted-stock-and-...

The problem is that RSUs are still a joke and can be taken from you easily. ISOs have way, way more power.

https://www.retina.net/tech/rsus-vs-options.html

That article is terrible, please do not use this to make decisions. Just about every "downside" he lists could also apply to an option grant. All equity grants will come with an agreement and restrictions on whom you can sell them to and under what circumstances, whether options or RSUs. Worse, he goes on for quite some time about how little upside you have with RSU. That has NOTHING to do with the RSU itself- it comes because companies that issue them typically do not have much growth left in them, not because it is a RSU vs an option. The differences between them are...

1. Tax treatment (A RSU counts as income when you receive it, an option counts as income when you exercise it and get stock. Remember, many people recommend early exercising options anyway for preferable tax treatment, though this can lead to taking a loss on taxes if the shares wind up worthless. If you are forced to exercise a large block of options when they are still illiquid, you will have a very large one time tax bill, which may be much harder to deal with than smaller ones each year) 2. Risk (For options, you have to dish out cash from your pocket to actually receive stock, which is more risky than if you don't. Until exercise, the two choices are similar)

In general, I would prefer options with a long exercise period, but I may prefer RSU to options with a short one...

I know nothing about RSUs at pre-IPO companies, but RSUs at public companies are worth real money, a fact this article fails to mention.

So are options. Options at a public company can typically be exercised and sold as an atomic operation from the owner's perspective, with the exercise price (and taxes) being extracted from the sale's proceeds.

I was of the impression that typically a portion of your RSUs are used to handle the income tax from receiving them immediately, so you simply receive less RSUs as opposed to the full amount plus a big initial tax bill. That seems to me like a good way to offset the risk that the RSUs could be worthless in the future.

Yes, the company issuing the RSU's must pay the taxes for you. They do that by selling a portion of the shares to cover the tax (which at least where I've been works out to a bit above 40%).

Not quite -- they must WITHHOLD the tax. You have the option for them to sell the shares. If you'd rather, you can send them a check for the tax bill and hold all the shares.

That only works if the company's shares are publicly traded.

Care to give a citation there? I'm quite certain you are wrong; there's no reason your employer can't withhold X% of your RSU at vesting time for taxes. In practice all this "really" means is they don't give you the full amount and send the equivalent dollar amount to the IRS instead.

It seems like this would be a very costly alternative for a company since it would essentially be a commitment to buy back 30-40% of outstanding RSU's at the equivalent price (current 409A valuation?). Over time I'd imagine this would become a major drain on cash reserves.

Google, Facebook, Netflix etc. can do this easily since they can just sell the RSU shares on the public market. It's the illiquidity of the shares that makes this option costly for private companies.

Correct. "Withholding" is something that companies do when they're legally required to, such as withholding taxes from your salary. When you receive a grant of stock or options, the company is not as far as I'm aware obligated to withhold anything. It's the employee's obligation to pay whatever taxes they owe. I have never heard of a company doing this, and I'm not sure there is any tax provision for it like there is for withholding from salary.

The common practice of immediately selling whatever percent of shares is required to pay taxes on them is something that employees are choosing to do, supported by the trading firms that help implement vesting schedules and stock sales. Employees are allowed to keep all of their shares and pay tax on whatever next interval is required instead, if they wish. One can only follow this practice of selling shares immediately to cover tax if the company's shares are liquid, i.e., the company is a publicly-traded company with an IPO.

I suppose in theory one could receive stock in a private company, and sell shares on the secondary market to cover taxes, but with private companies you can't take it for granted that (i) you'll be allowed to do that at all, or that (ii) there will be a buyer for those shares at all, or at a price you're happy with. With a publicly traded company, it is taken for granted that there's always a buyer for the shares, and at a price that is commonly known and accepted.

Companies do this so that their employees don't get into tax trouble. There were cases when the employees failed to sell the shares needed for taxes and later on the share price crashed and the employees were stuck with big tax bill. Like what I said in my other comment on options, the granted shares are regular income at market value; and if you don't sell enough and later have losses the losses would be capital loss. Unless you have other big gains to offset you can use only $3000 a year to offset your regular income.

Indeed, the tax man doesn't accept payment in illiquid stock (or any other kind of stock).

You're normally given the option. If you want to pay taxes out of pocket, you can do that.

tldr: 83b isn't just for RSUs.

You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well.

> You _may_ be able to perform an early exercise on ISOs and perform an 83(b) election at the same time. I've done that twice now .. the first time worked out very well. The second time I'd anticipate will work out quite well as well.

Be careful. If your total grant (not the amount your exercising, but the total amount that will vest over four years) is worth more than $100,000, the amount in excess of $100,000 will lose ISO treatment and be treated as NSOs. So if your grant is worth $500,000, and you early-exercise a single share, $400,000 will be automatically converted to NSOs.

This is an IRS rule, independent of your company's terms.

I've wondered about this before--what is the meaning of the _worth_ of options for ISO treatment? Suppose you have ISOs for five shares, with a strike price of $1: the company goes public, becomes Berkshire Hathaway, time passes, and the stock is now worth $101,000 per share. You exercise one option and immediately sell one share. Do the other four shares remain ISOs?

Yep. And there is the problem. I don't want options to buy anything. I want shares. Actually, I want cash.

You can exercise your options the day they're granted, even if they're not vested.

That said, they're not really worth anything to you until they're vested, of course.

I've never worked anywhere that would let you purchase before vesting. You accept a new position that came with 20,000 options vesting over 4 years with a one year cliff. At the end of one year, 25% of your shares (5,000) are now vested and you may purchase them. The company might have a valuation for them that's higher than your purchase price, but they are still typically worth "nothing" in that you can't sell them (assuming you're at a startup that's not yet publicly traded.)

Now the remaining 75% of those options might vest monthly over the next three years. "Vesting" does not impart value. It's not indication of whether you're going to make any money at all. Vesting is an instrument used to make sure you stay on with the company for an appropriate amount of time before you're allowed to own part of the company at that discounted rate.

Point: no, you cannot exercise options at grant time, you can only exercise once vested.

Sorry, I meant ISOs. Good clarification.

Don't take the risk.

Treat is as a lottery ticket. A good friend joined a late startup company in 1999, and in 2000 he was worth 40 million, of which he managed to cash out 10 million before the stock crashed. But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less.

You basically just said, totally straight-faced: "Don't do it man, it's not worth it! My friend thought he was worth $40 million but was never able to cash more than $10 million out."

That is literally the structure of your comment. You said, don't do it, you mentioned your friend as for why not, and the punchline to his sad story is he only cashed out 25%, or $10 million, of what he thought he had.

By positioning this as your example of a loss, I don't think you could have made a stronger argument for doing it if you had tried. Anyone who has $10M is set for life and independently very wealthy: they're rich. They could fly every two weeks for thirty years, for example (780 trips) staying at a four star hotel every day of that entire time (100 euros * 365 * 30 years still gets to only $1M). I mention these because they're luxuries. He's loaded.

You missed the second part: "But that was in the days of IPOs, now the investors prefer to keep the rise in equity to themselves. So you chances of winning the lottery are much less."

I didn't miss the second part.

The second part was basically "but that was during a different time when such a thing was possible" and the not-too-subtle implication is that it's not possible anymore. You know, since startups aren't IPO-ing to nearly the degree that they used to. If at all.

Hence the "it worked for him then, but probably wouldn't work for anyone else, now"

It's not just "aren't IPO-ing" - the rapid sale described is often banned today under agreements where shares can't be offloaded for a certain period after the IPO, so that the banks backing the offering can make their money.

This lockup normally affects everyone who had shares pre-IPO -- investors, founders, and employees -- when did it not exist? It played a large role in making people sad when the Internet Bubble burst, for example.

That's pretty crappy. Another way to prevent anyone but the founders and investors from capturing any value from the IPO.

Instead of selling your shares right after the IPO, couldn't you trade options on those shares in a way that closely simulates selling the underlying equity, and stay within the agreement?

It's definitely crappy. I'm not sure what rules the founders operate under, but it's definitely something investors and underwriters push. Nominally it's to control liquidity, and it does do that, but it does so specifically by handing all early returns to a few of the shareholders. It's not hard to imagine other systems that would, with a bit more work, manage liquidity while letting everyone access the market.

On the options - I'm honestly not sure. I don't think it's barred by contract (since that's about managing actually control and share movement), but I don't know what options trading looks like for newly-IPO'd stocks.

In a word, no.

https://blog.wealthfront.com/hedging-stock/

Bummer. Startup equity indeed looks like a sucker's bet.

Many agreements explicitly ban just-post-IPO sales these days. His point is that the $10 million in profit would have evaporated if not for a rapid cash-out which is often illegal to perform today.

You're right, but there's a better way to think about the $10 million, called the "safe withdrawal rate".

If you're 65, a good rate is 4%. This means that if you invest your $10 million in a diversified mix of stocks and bonds, and you withdraw 4% per year, then there's a very good chance that you won't run out of money before you die. See: Trinity Study [1]

If you're younger, you should probably use a more conservative rate of 3.5%. That's still an annual return of $350,000, for the rest of your life.

According to your rate of $110 USD per night, you only need to spend $40,000 per year to live in a four star hotel.

First class flights seem to cost around $3,000. You could fly twice a month for $72,000 per year.

Then you have $238,000 left over for food and entertainment. (And hopefully some charity.)

[1] https://en.wikipedia.org/wiki/Trinity_study

You should also be sure to save enough for healthcare related expenses FWIW

What about taxes?

I think we're talking about after-tax money; unless you live somewhere that has a wealth tax, once you've paid all your taxes on income (wages or capital) then you're free and clear.

Common retirement strategies, like a 401K, differ taxes until withdrawal. So taking out 4% of your portfolio every year upon retirement would in fact incur taxes. Since a 401K is massively tax advantaged in your highest earning years it only makes sense to maximize this portfolio while you can thus delaying, but not avoiding taxes, until a later date when you'll likely pay much less on the income.

The issue is not that investors prefer to keep the rise in equity to themselves.

The issue is that in response to Enron's collapse, Congress implemented The Sarbanes-Oxley Act. This makes IPOing massively more expensive since you have to go through a bureaucratic nightmare first. One established, the costs of continuing may be controlled. But coming into compliance is a headache that people want to avoid.

I wonder how many commonly utilized tools in startups actually reduce the overall chance of the companies success?

Not sure high stress and wacky work environments are very productive outside of sales. I'll leave it at that.

There is an alternative. Vest and buy the shares as soon as possible. This way, your taxes stay low, and you don't actually pay that much for the shares.

You aren't risking hundreds of thousands of dollars, only maybe 10s of thousands.

Not really if you join a unicorn, as this article was about. Unless if your grant is relatively very small, in which case you're not getting much benefit to joining the unicorn in the first place, at least in terms of possible stock upside. If you join a unicorn and your grant is anything less than $100k then you're getting a raw deal. (Again, at least in terms of stock upside, there may be other reasons to join.)

I walked away from a unicorn, a few years ago. If I had stayed - and somehow survived the effects it was having on my mental health - I might actually be a millionaire now.

Instead, I bought a fee thousand dollars worth of shares - only what I could afford. They IPOed at 10x, and I made a down payment on a house.

But that was a rare case: I had some extra savings, the company was clearly succeeding with clear intent to IPO. And even so, I had to wait four years for a payoff.

How was it affecting your mental heath--stress, sleep deprivation?

well, I developed a kind of generalized anxiety - I think it came from the long hours in a fairly large and crowded open-floorplan office - it was just way more constant social contact than I'm comfortable with. I guess if it was stress, it was stress from trying to perform while conforming to an environment that I found profoundly uncomfortable. Also there were nebulous culture mismatches that made me feel like I had to put on a fake persona to fit in.

Now I work from home and I'm much happier.

i call open floor plans "sweatshop chic"

Most countries have sane tax codes that say you only owe taxes when there's a liquidity event for you. The US is exceptionally bad in this respect of taxing illiquid paper profits, and of onerous lockup periods (SEC rule 144).

An investment of mine that yielded 5X exit transaction ended up being 1.3X for those reasons, and I was lucky - if it closed a couple of months earlier, I would end up with 40% loss and a useless tax credit.

Australia is even worse in that you owe tax on the options, before any event of any kind has occured. I think that they're pushing through legislation now in order to make it more US-like and allow founders to offer these worthless lottery tickets to potential employees :)

I Canada I can defer paying the (income) taxes on the options exercise until 'deemed disposition', which unfortunately also includes going bankrupt. And the possibility to count the capital loss against the income is severely restricted.

Canada has a much better treatment of capital gains than the US. Instead of a separate tax, 50% of the gain is taxed as ordinary income.

The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen.

Typically you are granted X number of options. You are never told what the outstanding # of shares are and typically the shares themselves are valued in pennies. The idea is you think to yourself "well, it's 10k shares worth about $5k at the current valuation, but if they IPO and it does what google does...I'll be a millionaire!" You never take in to account that the likelihood of you joining a unicorn like google is near 0% and not taking in to account the time frame of such an adventure, the opportunity cost, dilution and other tricks companies play on their employees before IPOs and acquisitions like reverse stock splits.

And the likelihood of a startup valuation increasing 10x in 4 years (typical vesting schedule) after dilution is extremely extremely unlikely to the point that it is time wasted even entertaining the outcome of such a scenario.

> The whole premise of a startup in any stage hiring a technical employee and granting them $100k worth of stock options will never happen.

That's a false assumption. If they raised $1M seed at a $6M cap, that's 1.4-1.7%. I just pulled up AngelList and there are a number of seed companies offering that along with a decent salary. Taking the $6M to $60M is the risky piece and that's going to be hard, but opportunities to try are definitely available.

> You are never told what the outstanding # of shares are and typically the stock are valued in pennies.

If the CEO is unwilling to tell you when you ask, walk away.

I have literally, personally, gotten an offer that that included options denominated in the current share price in dollars, and it was a little over $100k.

Standard procedure in the valley is about ~$100k in options at present valuation. Granted this is typically calculated without adjusting for the lower valuation of common stock, but the presumption is that in an IPO-like liquidity event the common and preferred stock valuations would be basically the same.

> And the likelihood of a startup valuation increasing 10x in 4 years (typical vesting schedule) after dilution is extremely extremely unlikely to the point that it is time wasted even entertaining the outcome of such a scenario

You don't care about relative growth with options, just the difference between strike price and sell price. A '10x' growth of 0.01 to 0.10 only gains you 0.9 per option; a 2x growth of 5 to 10 gives you 5 per option.

Which is also why looking at your grant as '$100k worth' is silly. Look at how many units you have, and how the price might change, not what the strike price is right now.

You are absolutely wrong about the $100k option grants. There are a lot of startup that offer that to senior engineers.

I always ask what the valuation is, and they'll usually tell you after some back and forth of "why are you giving me a job offer with a value that I don't understand? You wouldn't keep the salary a secret, so why are you keeping the value of my options secret?"

The good news is that there are a couple new firms that aim to address this exact issue. The firm I work for is called the Employee Stock Option Fund (ESOFund) and we aim to help employees exercise and cover the taxes associated with the exercise (on a non-recourse basis - meaning you don't have to pay us back if the company fails). In exchange, we split the future profits. If you use us, it is a risk-free way to exercise with a chance of significant profit in the future!

https://employeestockoptions.com/

What percent of the "profits" do you take? Can you explain how ESOFund would work in the situation I outlined above?

Each of our deal is custom tailored to the specific situation. In the situation above, we would help provide the 300k upfront and then we would negotiate terms. We aim to take less than half of the ultimate proceeds, but that ultimately depends on how the company exits. We don't require any transfer or pledge of stock and as a result, we take on a lot of counter party risk. We aim to price it in such a way where it is a good deal for the both of us. As you can imagine though, the deals that cost more money upfront requires a high payoff in the future. The other advantage we offer is that we can move extremely quickly. While other firms might take a few months to decide, we've closed deals in less than 24 hours before.

Or, like one of the companies I worked for, you could exercise your options, wait for a large Fortune 500 to buy them up, but then get told that your bylaws have a special provision that if the sale doesn't clear a certain amount, everyone's common shares are liquidated.

As in we got zero. Nothing. And this software is still in use in a major product.

So no, please don't trust options or exercised shares at any private company to be worth anything.

You want to get paid? Negotiate salary and laugh in their faces when they offer you options.

Everyone wants to believe it won't happen to them and that their company must be special since they work there. But sadly this happens to brilliant people all the time.

Cash is king. Realize you don't understand finance much less finance in an opaque, illiquid company.

Say it 3 times: "Cash. Is. King.".

Max out your 401K and negotiate a company 100% match if you can. Start a private investment account and a savings account and distribute to them every check. Keep doing this. Maximize all this before you become Johnny Wall St. with your illiquid stock options. They're as useful as a penny stock as not as liquid.

Buy some of them if things look bright but classify the investment as your "highly speculative" class of investments and thus ensure they are a small part of your portfolio.

If you ignored the options at the start and got the market rate salary as the OP suggested, then you can just wait it out. That's the point of getting market rate up front.

I think what the OP was really trying to avoid was working for 1/2 market rate for years, and then ending up in your scenario.

So I never understood - it seems like it would cost you 200k to buy something worth a million. Arent there people/institutions out there that would cover the 200k cost in exchange for maybe 300k worth of stock?

Yes, it's my understanding the company will sometimes offer ways to finance the options purchase such as cashless exercise, or promissory note. Alternatively you can taking out a loan (anything from a general loan, to a specialize 'options exercise loan'). Cribbed this answer from the longer form one here: https://www.quora.com/How-am-I-supposed-to-afford-my-stock-o...

Most banks will give you that loan if the stock is liquid and actually evaluatable.

But if something happens on your way from the bank to the stock sale, guess who still has to pay back all that money.

It's common to perform a sell-to-purchase, covering the stock purchase with the sale of itself.

Unless there's buyers for that stock lined up, what you're buying is only worth a million on paper.

There's a growing secondary market for illiquid shares of private companies; I would look into that before letting the options lapse. There a few market-making websites as well as VCs that specialize in this.

You need to be pretty savvy to marshal the whole process and understand the contracts, though - it is not turnkey.

Most unicorns disallow this nowadays to prevent the headache Facebook had when IPOing (very explicit you cannot transfer shares without the companies consent clauses in contracts). Some do controlled tender offers which allow employees to sell some shares, but these happen at the behest of the company, not the employee.

Don't most options include right of first refusal and more, to prevent you from selling them on the private market?

Yes, but ROFR doesn't necessarily hurt you - it just slows down the deal. Also, the VCs who do this also structure the deal in certain ways to make the ROFR price unclear and therefore negotiable.

But, you're right, some start-ups are explicitly putting in an explicit "consent" clause into the ISO. Which I think is unfair, and kind of BS - certainly if such a clause were valid, that would drastically reduce the value of non-publicly-tradeable shares, and it would be nice if the IRS agreed =)

I was at a start-up -- that I co-founded, so I take some of the blame here in not realizing what another co-founder was baking into the cake, but at least I can warn others now -- where the company interpreted "right of first refusal" as "the person trying to sell shares must hire an outside auditor to determine FMV," and refusing to answer any further questions about whether the auditor would actually be given access to the company's books.

Many private companies, e.g. Uber, doesn't allow unapproved secondary selling of their shares.

can't you sell a future security on your shares though? This is a "promise" to sell at some point in the future, can't see how can this be prohibited.

On paper you have a lot of money and the company reasonably might go public a couple years after you leave.

If you aren't at the company, it will be extremely ordinary for some funding event to dilute you to nothing. And you will have absolutely no say in the matter, because you're an outsider who, and this will be a direct quote, "isn't moving the company forward."

For me personally, if I was in that position I would stick it out for however long it takes. I cannot imagine having enough liquid assets to be happy to risk $100k like that. I am also of the opinion that even if I did amass such value in equity that there's a high chance I'm going to get screwed on whatever the book value of it today is tomorrow when I actually cash out. If it's so bad that I need to run not walk out of the building then I'd have to just make peace with binning it off.

For most of us where startup equity comes with a real valuation of zero (i.e. anything but the Uber or AirBnBs of this world) - I think you're a lot better off ignoring it entirely.

> to walk away from this situation with nothing

This is where I think you are healthier having at least a market rate salary. Then you've not walked away with nothing - you've been a regular employee and happy with your lot and ready to move on.

>> I cannot imagine having enough liquid assets to be happy to risk $100k like that

$100k isn't much money. If you've taken stock in lieu of $15-$20k/yr salary, $100k is pretty easy to make up (especially considering that many bigger, established companies also pay bonuses and have a better structure for vacation and such).

>> anything but the Uber or AirBnBs of this world Personally those are ones I'd be really, really scared of having stock in. They've boxed themselves into a corner: they have precisely one positive exit scenario: IPO. At their current valuations (2x and more of their competition), there's no reasonable path to acquisition. And if they continue to take investor money, those late investors are taking care to protect themselves (whether it's multipliers, last-in/first-out, etc). Employees are absolutely last in line to get the scraps unless things go crazy.

After IPO, there's the lockup period, during which there are earnings results (I believe 2?). If those don't go really well, a downturn in stock price can wipe out employee shares pretty quickly. If I'm an employee of either of those two companies, I'm a little nervous.

> $100k isn't much money. If you've taken stock in lieu of $15-$20k/yr salary, $100k is pretty easy to make up (especially considering that many bigger, established companies also pay bonuses and have a better structure for vacation and such).

I'm not sure I follow. If I agree to be underpaid by $20k a year say then I'm not sure how I'd then on reduced salary save up $100k after tax and to the extent I wouldn't "miss it" in exercising the options. If a company is paying bonuses etc I'd rather get the market rate salary to begin with and ignore the stock. I may be heavily misunderstanding your first sentence though :)

The lockup period post IPO is an excellent point - and probably further fuels my cynicism around low percentage stock options as anything but a gamble.

Nope, I think I mis-understood what you were saying :) I thought you had said "risk $100k" meaning $100k worth of on-paper gains, not $100k of cash to gamble on stock. My mistake!

You divide 100k by 3 to account for the risk, and by 4 again to account for the vesting schedule (usually 4 years).

The shares are worth at most 8k in salary, that is if they're somewhat liquid. (which they are definitely not for startup and far away IPO).

If you took a $20k drop in salary for that, you've been not only screwing yourself at this job but also for ALL your future jobs, because future companies will try to downplay you based on your current salary.

If a company asks for your current salary, say "I'm sorry but I'm restricted as to who I can share that information with".

If they ask who made that restriction, link to this post.

You are not going to get a year's salary in ISOs. You're not. At typical ISO strike prices (i.e. prices on the range ones of dollars), that would be an a lot of options. A company is simply not going to do that. It's much more likely you'll get something like half your salary or even less in ISOs (of course vesting over 4 years). This doesn't matter if the company IPOs with a 10x multiple of the strike price, but then again, the company has to have a major liquidity event.

The uncertainty around the current valuation (which everyone has due to the infrequency of material events), the uncertainty around the likelihood of a major liquidity event, its size, and its type make ISOs incredibly hard to accurately price. If anyone says they can do it accurately, they're lying.

What makes you so sure? Say the company is valued at $300M when you join. $100,000 worth of ISOs is 0.03% which is not unreasonable if you're an engineer from say employee 5 to employee 50 or so. Now, the company becomes a unicorn valued at $3B which is 10x.

I'm not saying that the basis points are unreasonable. I'm saying that my salary is more than $100,000.

I believe It's only a $3K per year income deduction if you have no other capital gains to offset it with. If you have future capital gains of $200K, it can make that go to 0 and you wouldn't have to pay tax on it.

Ah, yes, you're right. It would offset future capital gains.

> "Or do you end up locked in for a few more years of handcuffs while waiting it out?"

The golden cuffs _will_ click if you stick around any time at all and have even slightly bad luck: Maybe you burn out before vesting, or the company blows an acquisition that would've fit your schedule and your payout/life goals.

Waiting around after you hear the click becomes a losing game. Find another one to play, it's a big world.

I think it is a lot more than 20% to pay the tax man since the gain on the exercise is considered regular income. This could be a big problem if the stock is still illiquid on the day of exercise. And if you later couldn't get the private valuation price the loss is capital loss and only $3000 per year can be used to offset regular income.

It's much worse in late stage startups where expiration means use em or lose em.

It comes down to a gamble. With your numbers, a big one.

But until that choice is forced on you, I say wait. There's no reason for an early exercise. Even with slight tax advantages I'd rather call that the cost of minimizing my risk.

> Now, you have to come to the table with the $100K to exercise and probably another $200K to pay the tax man

But why shouldn't I just come to the table with $10k and taxes, exercise those shares, then use the profits to buy up the remaining shares?

Because there are no profits because you can't sell the shares because the company is private.

This reads like a Faustian bargain. I've seen this sort of stuff happen over and over to my colleagues, it was worst in the late '90s and early '00s. As much as I wanted to work for a startup once in my life, I learned that the only way to do "startup" is if you are the founder. Practically everyone else is along for the ride.

The US used to have a steady IPO market but that has dried up in recent years. I have read that 2017 might brighten things a bit, but we'll see.

"The US used to have a steady IPO market but that has dried up in recent years. I have read that 2017 might brighten things a bit, but we'll see."

The biggest problem is SOX: going from a private company to public (something I've done twice, now) is a pain, and can take a year to implement all the regulations (you may even need to change source code, and also commit processes). It's even worse on the accounting/business side. More importantly perhaps, it's expensive: you don't want to take your company public unless you can afford the hit to productivity and cash flow.

According to the WSJ, that's why there aren't more IPOs these days.

Yep, it's way easier and way less friction to store everything including payment information in one huge database accessible to all employees.

A security nightmare, but time and time again we've seen you don't need good security to make a lot of money.

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