An Early Engineer's Guide to Early Stock Option Exercise

There’s no mention of Qualified Small Business Stock, QSBS. If you are early on, this is more important than 83b or early exercise although more difficult to manage.

https://www.andersentax.com/services/for-private-clients/bus...

My problem has always been that startup pay is often below market and when you are already making below market, shelling out $20k to exercise is prohibitive. In my case that would mean spending more money than I put on the down payment of my house or pay for a year of my kid's daycare.

With that said, if you can afford it it is a great way to lesson the tax blow in the event of an exit.

Just to be clear, though I'm sure it won't shock anyone, the article is very US specific and therefore it's entirely likely that parts of the advice will not carry over into other tax jurisdictions. I only comment this as I had assumed it was a more general article than dealing with the tax specific aspects of options.

I went to a workshop hosted by eShares Inc. regarding stock options a few years ago. They've since put it up on their blog. Highly recommended: https://blog.esharesinc.com/equity-101-stock-option-basics/

Btw, if your employer haven't used eShares Inc for cap management, they should. It's much more streamlined with the electronic stock certificates and exercised (no messy paper trials to keep!)

The spreadsheet with formulas is more helpful than I would have imagined (remember to look at the assumed constants tab).

80% of startups fail and 20% succeed in some fashion. Which means if you normally make $50,000 and take a $5,000 paycut to work there you will lose $20,000 over the 4 year vesting period in salary.

80% of the time when the startup goes bust you make 0 on equity and still lost money due to the paycut. For a total of 8x20 or $160,000 loss.

The two times you are successful you make 2xEquity.

This means your equity has to be at least worth $80,000 each time you succeed.... just to break even with salary.

Factoring in the risk of your equity being 0 you should be getting a LOT more equity.

It's very similar to calculating expected value in poker.

Really great article. I hope the government repeals the AMT tax as expected in the coming tax cut bill. You are right that there is little material out there for resources.

Another resource is https://github.com/jlevy/og-equity-compensation (was posted here a couple years ago). It has the benefit of being "open source" so it might be easier to contribute to.

Great read- thank you!

I 10/10 thought this was going to be about doing squats at my desk. Sigh.