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Comment by hkmurakami | Hacker News Reader

There is one "good reason". To hand cuff and trap employees. I hope that the incidence rate for this is low, but it must be non zero.

(I think pre series A companies should give out RSUs and not options to avoid these situations)

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There actually are other non-nefarious reasons. When employees exercise they become shareholders, and certain securities law regulations come into effect. A young startup might want to defer those until they are big enough to handle the administrative overhead.

Also, while it's a tremendous tax benefit and pretty much a no-brainer to early employees, once the strike price constitutes an investment of tens of thousands of dollars, all of which could be lost, it's not necessarily a popular or prudent choice for later employees. So then it becomes this thing that only the early employees get, which perhaps might lead to some resentment and morale issues. Just some issues for companies to consider.

Good overview of the pros and cons here: http://www.startupcompanylawyer.com/2009/01/11/should-a-comp...

the "early exercise" that harryh refers to carries the same handcuffs as an option grant - a (typically) four year vesting schedule. The difference is that instead of vesting "the option to purchase shares" you vest the removal of the option for the company to repurchase the shares it sold you, at the original purchase price. In other words, if I exercise early and leave after two years, the contract states that my employer can purchase my unvested shares back at the original price.

An option grant where the spread has become large enough that the employee cannot cover the tax burden upon exercise effectively handcuffs said employee to the company until a liquidation event.

Early exercise minimizes the tax burden reason for handcuffing.

sometimes startups put the strike price below current valuation if they've raised at least their A round.

They cannot. Backdating or artificially deflating the asset price is no longer legal.

What's likely to happen is new investor extracting some special terms for their investment, receiving preferred stock that's valued higher than common stock. The company then turns around and uses the product of preferred stock price and total number of shares outstanding as the new valuation number that's "leaked" to the press.

The 409A valuation of the common stock is a separate dollar figure, though.

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