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Comment by hedora | Hacker News Reader

It is not the strike price or the exercise price. It is more-or-less the fair market value of the options when they vest, but if you need to compute your taxes, consult an accountant. (Yes, this rule is terrible for planning, because you don’t know what fraction of your shares are ISOs until they vest).

Today, ISO’s are commonly given to engineers at pre-IPO startups. Nothing says they have to go to execs. Those engineers end up holding them for years before they can exercise, so $100K is a small fraction of a normal Silicon Valley startup, when you divide it out. Many startups take 6-10 years to IPO these days.

Source on $100K cap: stock plan admins at work, and also this article: http://help.capshare.com/knowledge-base/what-is-an-iso-100k-...

Please do not comment on technical nuances of the tax code you do not understand. Misunderstandings around this stuff bankrupts people all the time. (especially the type of people that hang out here!)

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"It is not the strike price or the exercise price. It is more-or-less the fair market value of the options when they vest, but if you need to compute your taxes, consult an accountant"

This is not correct. The $100k threshold is calculated based on the fair market value of the option at the time of grant, which by definition is the exercise price. So you calculate how many shares you will vest in each year, multiplied by your exercise price, and as long as that is under $100k you are not over the limit and your option remains an ISO. If you're over, then the portion that exceeds $100k is treated as an NSO, but you can still get ISO treatment on the other part.

I'm a startup lawyer and having worked with 100+ companies on their options, it's really not that common to get tripped up on this.

I misspoke in using the term exercise value. However (and you’re a lawyer so I’m going to believe you here) everything I’ve read or can make sense of says it is the value at time of grant that the cap applies to, not some fluctuating fair market value at time of vest. Is that correct?

Oops we are agreeing. Threading on the phone is rough. Anyway I updated the post to clarify cap calculations.

What reasons might an early stage company (founders + 3 employees, say) have for giving the employees NSOs instead of ISOs? I was once in this situation and everyone I spoke to about it thought it was a flat-out mistake on the company's part, but I've always wondered if there was another reason.

Almost certainly a mistake. The only way I can imagine is if the company was pulling a fast one on employee taxes. If you’re a 1099 contractor, you pay your own taxes and are not eligible for ISOs.

Did you get W-2s with withholding at this place?

Yes. I wonder how this would have turned out differently if I'd had ISOs. I exercised them all and paid taxes on the difference between the strike price and the 409(a) valuation, treated as income, and the company did me a favor by arranging for me to sell a small number of shares to one of their investors at much higher than the 409(a) valuation to cover my tax bill (the agreed-upon price was close to, but not quite, what they were planning to raise their next round at). I thought this was a pretty classy way to solve the liquidity problem for an employee that owed taxes, and I would like to see something like this become standard.

Sounds like you got pretty much exactly what you would have in an IPO (presumably at a lower valuation of course) if you'd decided you were bullish on growth and didn't want to diversify.

The main thing you missed out on was the ability to 83(b) exercise. If you don't know, that is something you can do in the first 90 days following the stock grant, where you write a check to the company (usually some administrator the company designates) that exercises at the same value as what the grant was written at. That means you 1) don't have any capital gains to worry about, which with AMT can be a big deal, similar to NSO treatment and 2) start the long term capital gains clock, so you are potentially taxed at a lower rate than ordinary income.

Since it sounds like this startup went out of business (?) I think you were essentially treated as well as possible.

No, it's still going and quite profitable. They never even took their next round, so dilution has been minimal. Edit: still private, though, so no liquidity on what I own. Patience.

Only a couple or reasons they'd deliverately do that. Most common is if the employee is outside the U.S. and not a U.S. taxpayer, making the distinction irrelevant.

Or, if you plan to early exercise immediately upon receipt, you actually are better off with an NSO (due a shorter holding period for long-term capital gains treatment and there being no spread between exercise price and fair market value at the time of exercise), so sometimes you will see that too.

Or, if you want a longer than 3 months exercise period post-termination, you'll do an NSO instead of an ISO.

But otherwise, yeah, maybe just a mistake.

I've heard of longer exercise periods for ISOs, although these were while still employed. Is the 90 days post-termination encoded into law?

those convert to NQOs after 90 days. It's coded into law.

My employer has issued _all_ option grants as NQSOs (with "normal" 4 year vesting, but also with 90 day exercise or forfeiture, with FMV clawback right, with rather tepid spread between preferred and common after seed). I'll be charitable and suppose the big old law firm wrote this out of startup inexperience and a very strong dose of CYA. Any suggestions on what to do about this?

Sounds pretty unfriendly, but no, no suggestions really - it's up to the company what they want to give you and some companies are just stingy like that. Wish I had something more for you.

> the fair market value of the option at the time of grant, which by definition is the exercise price

Strike and option value are not the same thing. (Not sure which one this bill refers to.)

I just had to go double check this, because my statement above is based on actual experience.

> The $100,000 limit is calculated using the fair market value of the stock for which the options are exercisable, as of the grant date...

IOW — value at time of grant, not time of vest.

> Please do not comment on technical nuances of the tax code you do not understand.

cough. Sound advice, sound advice.

With the caveat that I know nothing about tax law, i feel like it's also terrible because it's procyclical for the employee. If you get taxed on vesting and it loses value when you exercise or liquidate you do get to take a capital gains loss, but you're likely to be doing that when you're jobless (due to business cycles and/or personal circumstances) so you're in a lower tax bracket anyways.

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