Former Uber employees have gone into debt to exercise options they can’t sell
qz.com
qz.com
Is how many many Silicon Valley horror stories begin. In the dot.com days it was "How working for a startup bankrupted me, and ruined my relationships." All because some situation forced a person to make the bet of whether or not their illiquid asset (stock in a private company) would ever become liquid. And that when it did, selling it would be more valuable than what you paid for it.
Clearly not everyone is as out there as the person mentioned in the article is, although I knew many people who had anywhere from $5K - $50K at risk because they had exercised and were holding. I had stock losses from the dot com implosion that I wrote off for over 10 years (at $3,000 a year) and it would have gone on for the rest of my life if we hadn't had a bit of long term gains to offset it later.
Also I always incorrectly think that these sorts of option traps are public knowledge, but then every now and then I'm prove wrong by even very smart people I personally know, not being aware of these traps.
Not sure how we fix this situation tbh. For starters "don't join a company without an extended option exercise period" is a decent first order heuristic, but not everyone has that luxury.
Many people just stick it out with their employer hoping that their options become liquid; in some ways that can also be risky/poor decision making. Maybe it's an unhealthy work environment or you've stopped learning/advancing in your career, or there's a real opportunity cost where you're foregoing a higher salary.
Maybe these people left because it was the better life decision (or maybe they were terminated), but regardless, most of us would think long and hard about giving up, say, millions of dollars in potential value. Hell, even at $300k in debt it might be a good or worthwhile gamble.
It's easy to dismiss this all as poor decision making, but there are real risk/reward calculations to be done here, and "walk away from millions of dollars" is not always the smart answer, even if it kills in the comment threads.
edit: not sure why the downvotes. if you are interested in a treatment of peer-based utility functions that affect risk premia, see https://www.amazon.com/Missing-Risk-Premium-Volatility-Inves... -- in other words, risk may not be best measured as volatility but instead as the expected relative wealth gain/loss to your market peers. for private employee equity, those peers are other optionholders.
Trump is special. The fact that Deutsche Bank was still willing to lend so much, despite his repeated bankruptcies is very interesting. If I recall correctly, he was involved in a lawsuit with one department at Deutsche over missed payments while a different department was signing over $700 million.
"[over-]extending themselves" - risky
"underestimated the tax consequences" - poor; this is a straightforward computation assuming you exercise your rights to get the latest 409a valuation after exercising a single share
Poor? That's yet to be seen.
I think it's healthy to just let vesting mean you get to take it with you, period, no catch. But it's worth noting this means there will be fewer options returned to companies in comparison to the last boom. Scott Kupor made this point although he framed it in a poor way.[1] He notes that it will in theory result in more dilution for employees that stay.
This sounds great in concept but in practice acquiring the shares is the taxable event. So if a company just gives you shares, that's the taxable event. And since you get taxed on the delta between your strike price and the "fair market value" (even though there isn't one), it would happen on the company's schedule, not your own.
If you extended the exercise window for N years, that would mitigate most of it because you could wait to execute until it's liquid. Or not execute at all if it goes under.
* I've been through two IPOs in the last couple years.. good planning shielded me from having major tax liabilities.
Unless they put them in your 401k, which is exactly what many (most?) companies do.
I have company stock given to me in my 401k.
https://www.fidelity.com/viewpoints/personal-finance/company...
>More than 15 million people own about $400 billion of company stock in Fidelity-administered workplace retirement plans alone
Though I've been at both companies pre-IPO so that is probably the first distinction. Post-IPO, the rules are quite a bit different so maybe it's an option now..
But, yes, as pointed out, you do pay taxes, but ONLY when withdraw from it, which you can do without a penalty when you reach a certain age. The capital gains are tax free. But I was saying distributing stock into a 401k is not a taxable event, not that you'd never pay taxes.
It's not abusive to fill up your 401k, that's what it is there for.
We agree. That's all I meant by "you get to take it [your vested options] with you," as opposed to turning them in on the way out the door if you can't pay the strike price + AMT.
This isn't the point of the story, but it may be a good bubble-check for some to hear that the idea of having family members in a position to lend this kind of money is mind-boggling to this reader of working-class roots.
(I still wouldn't do it but it's possible.)
Perhaps private companies should be forbidden from allowing the exercise of options for non-liquid stock by non-accredited investors, and then also forbidden from requiring un-exercised options that they have granted to non-accredited investors to be forfeited at the end of an exercise window so as to not be ludicrously unfair to the people holding unexercisable options.
It was fun to watch Andreessen Horowitz criticize[3] ten year windows and then backtrack[4] after a public flogging. That was when the power balance shifted towards more employee-friendly terms.
The part of this I'm still trying to figure out is when does it makes sense to offer RSUs over ISO/NSOs. My general sense is it works better for bigger companies than tiny startups, but I forget the details.
[1] https://zachholman.com/posts/fuck-your-90-day-exercise-windo...
[2] https://news.ycombinator.com/item?id=11198991
[3] "A 10-year exercise window is really a direct wealth transfer from the employees who choose to remain at the company" https://a16z.com/2016/06/23/options-timing/
[4] "the 90-day exercise essentially pits cash-rich employees against cash-poor ones. And that isn’t right." https://a16z.com/2016/07/26/options-plan/
This is an investor bias toward recency that is ugly to see laid out so clearly. Work, foundational work even, only has intrinsic value if it happens between board meetings. On top of that, it's presented as a kind of wage-earner on wage-earner theft. Incredible.
When the price started crashing, the big guys got out. The little guys remain locked inside. Something similar happened at Palantir. When a big little guy sued, things changed [1].
[1] https://www.bloomberg.com/news/articles/2017-03-18/at-peter-...
Disclaimer: I am not a lawyer. This is neither legal nor securities advice.
They're smart though. This reduces their employee comp cost significantly through cheap internal buybacks.
"200k in equity in option strike value for a very late stage startup is very unlikely to be ever be worth $200k even if an exit event happens.
I suppose that there are many different ways to be evil in this game, and we're just arguing which tactic is worse.
Large investors aren't able to sell because they hold their shares in LLCs. They're able to sell because selling rights are part of the terms they negotiated as part of their agreement to invest. The form of ownership has nothing to do with it, and indeed the use of an LLC as a holding company for corporate stock usually complicates the legal and tax considerations for the sale of stock held by the LLC.
Also not sure why you're including a disclaimer? You're not offering any sort of advice so you don't need to disclaim anything.
"Crashing" is a function of value, not registration status. For example, CDOs "crashed" in the crisis [1].
> Large investors aren't able to sell because they hold their shares in LLCs
With all due respect, this is wrong. Selling SPVs (or stakes therein) containing the shares of a single company is a common institutional tactic.
[1] https://www.bloomberg.com/news/articles/2016-06-14/goldman-s...
Disclaimer: I am not a lawyer. This is not legal nor tax advice.
It sure is. But that's not why the large investors get to sell their stock of Uber. They get to sell because they negotiated the right to sell, which may have included the right to use an SPV to hold their Uver stock. The SPV could have been a corporation, partnership, or LLC; the choice of the LLC form is not what gives the large investors the right to sell. Though based on your response, you probably meant in your original comment to refer to SPVs rather than LLCs.
Disclaimer: I am a lawyer. This is not legal advice, it's legal commentary. The difference: advice applies to a client's specific legal circumstances; commentary applies to third parties.
Lots of preferred stock does not carry the right to be transferred (or to be transferred free of other restrictions, e.g. a right of first refusal). SPV transfers are a convenient, if mutually-overlooked, workaround. Their existence is rarely explicitly negotiated.
Another case, more directly tying power and economics: Some companies require Board approval for transfers. Guess who tends to get Board approval.
> you probably meant in your original comment to refer to SPVs rather than LLCs
LLCs are a common way to structure special-purpose vehicles (SPVs). This is Hacker News. Most here are familiar with LLCs; fewer with SPVs.
Disclaimer: I am not a lawyer. This is not legal nor any other kind of advice.
Are you assuming that most corporate M&A lawyers don't know a basic holding structure taught the first week of the M&A class in law school? SPVs are not mutually overlooked workarounds, they're usually not worth the hassle in most situations. When they exist, they do so because the use of an SPV to hold the stock of the issuing company was explicitly negotiated as part of the investment because the securities law, tax, financing, and other considerations for stock held through an SPV, especially through a pass-through SPV like an LLC, can be very different from stock held directly. This is especially true for startups or other privately held companies with relatively complex ownership structures. (The use of SPVs is not negotiated for publicly traded companies, because the company's permission isn't required to acquire their stock.)
You don’t need to be an M&A lawyer to see why that’s problematic.
It has absolutely nothing to do with US securities law (or any other US laws), as the current laws don't prevent acquirers from buying stock from unaccredited investors.
Nobody said it did. The top of the thread specifically calls out Uber, not securities laws, for being shitty.
Softbank made the offer, not Uber. Under US law, the board didn't have much justification for rejecting the offer due to Uber's capitalization needs--the boardmembers could have been sued if they rejected it. Note that the board didn't approve the deal itself, they merely approved Softbank making the offer to the shareholders. The deal is contingent upon enough shareholders participating in the offer.
(Uber's capitalization needs matter here because it goes to whether the board is acting in the best interests of minority shareholders. In this case, the Board can say that w/o investment, those interests become worthless. This is different from a normal, revenue-generating company, like say Qualcomm, where the board can reject this sort of offer if they feel it undervalues the stock of the company, because in such case the lack of a deal doesn't impact the company's ability to operate as a going concern.)
I agree, but not everyone is in a position to do that.
It's been my experience that most non-lawyers on HN/Slashdot posting these disclaimers do so because someone once told them they'd be risking unauthorized practice of law charges if they didn't. That was the case once...before the first dotcom boom...Since then, NOLO and others have successfully challenged these restrictions on offering generalized legal advice in most states (including the ones that matter). Nowadays, you're only at risk of unauthorized practice of law if you're applying the law to a specific person's set of circumstances in a manner which clearly indicates that you are specifically providing advice (or other legal services) to them based on those circumstances. This is why NOLO and other guidebooks don't run afoul of these laws--they only provide general advice, it's not tailored to any particular person's legal situation. On a similar note, applying the law to a third-party's circumstances as part of a discussion is not the practice of law, it's commentary.
It's different for a lawyer. Lawyers are held to higher standards when it comes to online advice, but the risk there is whether the advisee believes that a client relationship has been created opening the lawyer up to malpractice liability. I could say that "Uber should do [X] to deal with legal problem [Y]" because it's obvious that Uber, as a well-funded company, has its own lawyers and would not treat my commentary as actionable legal advice or as resulting in a lawyer-client relationship. But I couldn't say "somethirdpartyperson should do [X] to deal with legal problem [Y]" because that person could reasonably treat commentary by a lawyer suggesting a specific action to address a legal issue as legal advice they can act on, and this belief is legally treated in most jurisdictions as creating a de facto lawyer-client relationship.
Getting a bit meta here, but I read "IANAL" caveats not as limiting personal liability but as a "reader beware". Almost as a courtesy to the reader by saying "I may not know what I'm talking about" without saying it. I doubt people discussing things on these boards are really concerned about the liability attached with actions someone takes after reading their comment.
Next up: evil companies in Silicon Valley invalidate employees' RSU when they leave the company.
[1] https://news.ycombinator.com/item?id=9254299 [2] https://news.ycombinator.com/item?id=9253497
Many companies allow employees and ex-employees to sell shares.
"Public" means your shares are registered [1]. "Private" usually means shares offered under Rule 506 of Reg D [2]. Public and private shares can be bought and sold. The processes, and their respective ease and restrictions, vary.
Palantir [3] and Airbnb [4], for example, recently bought back their employees' shares.
[1] https://www.sec.gov/fast-answers/answersregis33htm.html
[2] https://www.sec.gov/fast-answers/answers-rule506htm.html
[3] https://www.nytimes.com/2016/06/29/business/dealbook/palanti...
[4] https://www.nytimes.com/2016/08/12/technology/airbnb-and-oth...
Disclaimer: I am not a lawyer. This is neither legal nor investment advice.
From the SEC link:
> An accredited investor, in the context of a natural person, includes anyone who:
> earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
> has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence)
Wow. There are actually laws in place that say the rich are able to do things that poor people can't.
If you're a former Uber employee who moved somewhere with lower incomes and cost of living, you probably no longer meet the criteria needed to sell these stocks.
Though the article says otherwise, I don't believe one has to be an accredited investor to liquidate any position, only to initiate one. (I suppose there's an argument that you could swindled on the sale as well, but I find that a lot less compelling than on the buy.)
This has been discussed many times on HN. The purpose of the law isn't to prevent "poor people" from doing anything. The purpose of the law is to prevent companies from making unregistered sales of stock to people who aren't (1) saavy enough to evaluate the risks of their investment or (2) wealthy enough to survive a financial loss if the investment does not bear fruit.
In a nutshell, the law requires companies wishing to sell to the general public to register with the SEC and meet certain financial disclosure requirements, such as disclosing financials using standardized accounting practices, so that the people buying their stock can judge the financial condition of the company they're investing in.
Startups choose not to register or adhere to these disclosure requirements so they can peddle their BS financial "metrics" to investors using magical unicorn fairy dust bookkeeping.
But to address the direct issue: there are few, if any, Uber stockholders who hold 10,000 shares of the company but would somehow not qualify as an accredited investor. The tender offer isn't intended for small stockholders with de minimis ownership, it's intended for stockholders with enough stock to represent significant fractions of the ownership of Uber.
This is all true, however laws should be judged by their effect, not by their purpose. This law effectively allows rich people to do things that poor people can't. It also may protect un-saavy investors, although I would argue that an un-saavy investor will inevitably find some other way to lose their money regardless of the accredited investor law. They're probably buying bitcoins right now or something.
You're still not getting it. The law does not stop poor people from investing in a private company. It simply prevents the company from advertising its stock to "poor people" unless the company registers with the SEC and demonstrates at least a minimal level of financial controls. A company can sell its stock to poor people as long as it does not solicit them. This is why employees and friends/family can buy stock of private companies.
I will repeat again for emphasis: there is no law that prevents "poor people" from buying private company stock.
Outside of the handful of companies who have previously invested in the company (who are surely accredited), most entities who would qualify for this tender would be individual early employees. The accreditation requirement is also being held to those individual stock holders and option holders at the company who want to tender a sale of them to Softbank. Many are random engineers on this forum and other early-ish employees. Many may not meet the requirements for SEC accreditation, rules which specifically delineate around the wealth of the entity.
The article suggests there are folks who exercised 20,000 options (presumably representing one share each), but who had to borrow the money to exercise and to pay tax. Are you suggesting these people probably qualify as an accredited investor, or that their situation is unusual?
It's unusual because the offer values the stock at significantly less than last year's valuations, so they might not be accredited investors anymore...if the Softbank deal goes through and sets a new FMV for Uber stock. (If the deal falls through, then the $33 offer isn't a useful gauge of current Uber stock value.)
The issue becomes when do you assess whether they are accredited investors: before the deal, using 2016 valuations, in which case they should qualify; or after the deal, using the deal's offer price, in which case they do not?
I've never actually dealt with this situation before, where the deal itself could change a potential investor's accredited investor status, so I couldn't say what the outcome would be.
I don't know how much duty the counterparty has to investigate the validity of the declaration.
The result? A swell of employees who want to leave/move on but can't afford to buy their shares and leave. It's lead to a number of people just hanging around, even when their enthusiasm and passion is waining.
Not what options are designed for!
Not "deferred compensation"?
Maybe it's a common knowledge amongst the Silicon Valley engineers, but for those of us who are not in startup, could someone please explain how this is possible? Specifically, in what logic would you owe more tax to exercise the option(which amounts to purchasing at this point) for half the amount of tax you'll pay? How does purchasing something of $X force you to pay $2X in taxes? I've combed through this thread for answers and it seems like a commonly understood problem.
> Under current tax law, the income from exercising ISOs, a special type of option typically reserved for executives and senior employees, falls under an alternative tax calculation designed to prevent high-earners from using deductions to avoid paying tax. Non-qualified stock options, more commonly awarded to regular employees, are taxed the year they’re exercised on the gain in the stock.
why can't the tax be levied when the same stock is liquidated into cash? then you'd get a real price, rather than an estimate.
This is a massive issue in this era of companies which never allow their stock to freely circulate, and mostly is based on the previous eras in which a startup that granted options would actually go public at some point and allow the holders of the options to sell their stock for money.
So you join a shiny new "start up" and they offer you some stock options as part of their compensation package. This is typically done to improve compensation without requiring additional liquidity which is typically a limited resource for a start up.
These "ISOs" (Incentive Stock Options) are usually option agreements where the company agrees to let you "purchase" shares of the company in the future at a strike price equal to current valuation. So even if you "exercise" (purchase) the stock 2+ years later you pay the same price you would have if you had purchased the stock on your first day at the company.
The problem with tax here is that in those 2+ years before exercising your "options" your company may have grown/raised more money with greater valuations...so the value of the stock may have doubled, tripled, or increased in even greater value. Well lucky you! According to your ISO you can purchase the stock for the value it was worth 2+ years ago!
"Hold on just a minute," the IRS says, if you purchase a share for $5 that is "valued" at $25 now...what you actually have is an immediate realized gain of $20. Since you spent $5 and acquired an asset worth $25...you should be taxed AMT on the realized gain of $20. Makes sense.
The issue is with "valued" here. In the case of pre-IPO startups the stock you purchased cannot really be sold. Value of a pre-IPO company's stock is more or less correlated to what investors agreed to in your last round of funding (e.g. I <insert_investor_here> agree to give your company $XXXXXXXX for YY% of your company). But at the end of the day, you pay $5 for a piece of paper that says you have stock in a company that is estimated to have the value of $25...but isn't actually worth anything since you can't actually turn it into money. You can't sell that piece of paper for $25 (in fact, you can't sell that paper at all).
Which means you end up owing taxes on a $20 realized gain on an asset you can't sell. That is, you can't turn around and sell some of that newly acquired stock to pay your tax...again it's not really worth anything...it's estimated value is just higher than what you paid for it.
So the question is...where do you come up with the money to pay this tax? Well, in the case of these individuals, you go into debt.
Edit: FTR I think just taxing on sale for the entire realized gain would make sense to me as well...but I imagine this policy is to try and prevent high income individuals from dodging income tax by taking all their compensation in stock.
One could view the AMT as explicitly serving as a way to prevent poor/middle class people from becoming wealthy by way of stock options.
As far as the culture goes, from what I understand it's very backstabby and culty. Basically, Travis set the culture, and it permeates the company.
At IPO, RSUs get converted into stocks, however, there's a restriction that you can't sell them for 1 year from the IPO date. Tax obligation is handled by subtracting a portion of the units, rather than by paying out-of-pocket.
Beyond the obvious HR issues that Susan Fowler exposed, it was a bad place to work for almost any engineer. I would stay far away if you get an offer there.
As I understand, we tried using AWS to power key infrastructure but ran into scalability/cost issues. We still use 3rd providers for various things but my understanding is that a lot of this eng work is to reduce the costs incurred from these services.
I do agree though, as a new hire, that the culture here is quite a bit on the NIH side, compared to a more traditional software shop.
Further, does it make sense that you'd rather buy hardware up front to scale for Halloween and New Years instead of being able to dynamically surge your infrastructure?
Oh, that was what I was told during new employee training. I'm not in the infra org and tbh, I don't really buy the do-it-in-house-for-scalability argument either. I've also seen other employees express sentiments similar to influx's wrt infra.
But then my (white male) interviewer wanted to spend the left over 45 minutes talking about how diverse Uber was blah blah blah and that they were just unfairly represented in the press. I decided not to follow up after that.
Hopefully their culture improves, but it's not somewhere I'd consider working currently.
As the article mentioned, Dara has expressed that he would like to take the company public in a couple of years.
Not sure what his pay structure looks like, but assuming it includes equity, I would imagine it would be in his interest to go public
* "Microsoft Employees Face Tax Nightmare", AccountingWEB, Apr 19, 2001. https://www.accountingweb.com/tax/irs/microsoft-employees-fa...
* "Why Microsoft's Stock Options Scare Me", The Motley Fool, Feb 17, 2000. https://www.fool.com/archive/portfolios/rulemaker/2000/02/17...
* "Gates Regrets Ever Using Stock Options", Martin Wolk, NBC News, May 5, 2005. http://www.nbcnews.com/id/7713133/ns/business-eye_on_the_eco...
Is this the standard time window for exercise?
https://medium.com/@michaeldeangelo/unlocking-the-golden-han...
They give you 7 years to buy, so you don't get stuck with a huge tax bill between exercising the options and being able to sell shares.
For example say if I join company X today (where X could be Intel or Cisco or a similar company) and I have 40 RSUs vesting over 4 years. After 2 years I decide to leave X. 20 RSUs would have been vested.
I clearly understand that I am going to lose the 20 unvested RSUs completely. My question is about the 20 vested RSUs. Is there a maximum time limit before which I must sell these 20 vested RSUs? Or can I keep these vested RSUs with me for life and choose to sell them whenever I wish?
If it is indeed true that I can keep these vested RSUs with me for life, how exactly would I be selling these RSUs, say after 20 years? I mean, the company does not give me these RSUs directly on printed paper. The RSUs are held in an account in a website of a finance company such as UBS. I log into my UBS account to access my RSU details and sell them. What if UBS goes out of business in 20 years?
I don't know what happens if a brokerage goes out of business, but I imagine you're in the same boat as all the people who bought those shares with cash on the open market. Once the stock vests, it's yours.
UBS is only holding those shares for you under your own name (a key distinction from having a structure where the shares are actually owned by UBS and you legally own a part of UBS' contract with you).
In the worst case you can ACATS transfer your position to another brokerage (I did this with stock resulting from exercised options). I imagine there are federal laws regarding protecting your equity holdings (cash is more at risk than equity in this regard since they lend it away I think?)
under Wikipedia:
In the United States, to be considered an accredited investor, one must have a net worth of at least $1,000,000, excluding the value of one's primary residence, or have income at least $200,000 each year for the last two years (or $300,000 combined income if married) and have the expectation to make the same amount this year. [1]
Let's thank the sec for suppressing wages.
Oh? You managed to actually get stock in a startup that seems to be worth something? And you didn't get diluted to a pittance? And the board / founders didn't try to fire you or ask you to give stock back to the pool? Lucky you, you're one of the 1% of the 1%.
Now stay there until the company sells or goes public.
Wait -- they got bought? Congratulations, you just won 2+ years of golden handcuffs at Parent Corporation! Enjoy your new corporate job!
Alternative storyline: You leave startup early, exercise options and go into debt, startup dies, you lost money.
As if options had a value.
$100,000 in options sounds great but if it’s .01% of options then you’ll have to be part of a monster IPO or sale to get a windfall.
Always insist on the % amount. Most founders will try not to share it.
Also options are a % increase in share price play, so $100,000 strike price can at least give you some information wrt how much $ you can make if the per share price of the company triples, etc.
It's not always better to know % and % only. Let's say you get 1% options of a company valued at $10B. Options are priced at the preferred price, no discount. The company IPOs at $10B. Did you make $100M? Nope you made $0 so far!
Perhaps. But if a company will not give you a percentage of ownership and expects you to accept this as compensation, you should quit. Full stop.
If the company won't tell you how to fairly evaluate your options, they're operating in bad faith, and should not be rewarded for their sleazy behavior.
The important principle, though, is that they shouldn't be hiding anything from you. If the company won't even tell you the percentage your shares represent, you can't trust them to do anything else.
From a financial perspective, what you want isn't $1,000 worth of options, but a _risk-adjusted_ $1,000 worth of options. Which means in all likelyhood, more like $100,000 worth of options.
Oh, the company doesn't want to give you that much? Well then, "Show me the non-risky money."
But I don't think managers understand that while options might make people stay while things are going well, they make them flee (or worse, stay and become resentful) when things are clearly not going well.
If you reward someone for their service you have to do it right or don't bother at all. A reward that loses its value, is delivered late, or requires the recipient to nag you constantly to deliver at all, has negative value for the person. 'Thanks for nothing' is not something you want to hear from an employee. It crushes motivation.
As I understand it, you have to pay tax on the difference between the option price and the value at the time you buy them. So if you have a bunch of options to buy at $10 per share, and the company grows to $90 per share by the time you quit/have to buy your shares, you're taxed on $80 a share. Remember, stock in a private company is worthless until you find a buyer, which is one of the reasons the people referenced in the article had to go into debt to exercise their options.
30% of a large amount of imaginary money ends up causing a gigantic tax bill, paid in actual money.
If you have NQOs, this tax always happens.
Also wasn't there a further amendment to that after lobbying to exempt private company shares from this? I recall fred Wilson writing something to that effect.
This could be fixed in reconciliation, but with the way things are going, I wouldn't be surprised if the house just votes for the senate bill.
https://www.washingtonpost.com/news/wonk/wp/2017/11/30/what-...
Could be worse; in Ireland I’d pay a little over 50% on my options if I exercised them. Which is why I don’t.
I certainly wouldn’t be interested in taking a job in a private company where options were a significant part of compensation.
EDIT: Just noticed from the article, Uber employees had to exercise within 30 days. Wow. 7 years seems to be normal in this country.
https://medium.com/@michaeldeangelo/unlocking-the-golden-han...
Edit: Can someone point me to IRS docs? or blog explaining?
For regular (Non-qualified) options, current value - strike is considered ordinary income when you exercise.
Reminds me of California's debt crisis and "Hey! How dare you turn down state IOUs as payment? These are every bit as good as cash. ... Wait, you want to pay your state tax bill with state IOUs? Get that crap away from us!"
https://www.collinsbarrow.com/en/cbn/publications/taxation-o...
You can however use the Allowable Business Investment Loss deduction to deduct half, and if you hold the CCPC shares for two years, you can deduct the other half. So the danger zone is the two year window after exercising.
instead, potential startup employees can educate themselves a bit on how options are a risky derivative investment in the startup you work for. there's really no need for the bitterness in your post once you can properly account for them (they're like lottery tickets that are only mostly, but not completely, up to chance).
if you know some quantitative finance, you can (approximately) value the options (binomial and black-scholes are commonly taught in b-school), but it's really easy to miss important valuation factors that will throw your valuation way off.
for example, preferred shares bought by investors could have (very unfriendly) participating preferred clauses that discount the value of your common shares. you can value that, but you'd need to be pretty good about forecasting the future value of the company to get it right.
a simpler approach is to do a rough back-of-the-envelope calculation like this: i've noticed (completely anecdotally) that startups will give you options at the current valuation that if the company has a good outcome, will net you about 1-5 years worth of salary in the end. if my salary is $100K and i believe the chances of this startup succeeding is 20% (this is the hand-wavy part), my options are worth $20-100K in 5-7 years when the startup exits.
or if you're risk averse, you'll completely discount the value of the options in comp negotiations. that's different by the way from scornful statements like "options have no value" where you're completely surrendering your agency in the matter. in this case, you acknowledge your risk tolerance and account for it.
You're missing the constant drumbeat of "options will make you rich! Work 80 hour weeks, sacrifice your health and relationships, get paid well below market rate, join our startup!"
The entire VC industry is focussed on misleading people like this. One of the reasons for ageism in Silly Valley is that experienced engineers can't be suckered like this.
> if you know some quantitative finance [...]
> a simpler approach is to do a rough back-of-the-envelope calculation [...]
You're looking at this as if you're calculating the odds of winning the lottery and doing backwards math to figure out the viability. That's only half of the picture.
There are a lot of circumstances that do happen and can't be put into a math equation.
1) If a company is striking gold and you have significant options they can fire you before the rest of your options vest to get more stock back into the pool. See: Zynga
2) If the company needs to grow fast but doesn't have enough stock to offer new employees they can ask you to relinquish stock back into the pool to help hire more employees. If you refuse, go back to #1. There was a good post on HN where someone was being strong armed like this.
3) Dilution will happen. You can't account for how founders and investors will dilute things because there's a lot of tricks that can happen here.
4) At the end of the day, you're counting on the company to go public or be sold. The problem is that founders turn down huge acquisitions all the time, only to have the company -- and your stock -- become worthless. See: Digg and the would-be-millionaire employees that ended up with fat debt from exercising.
There's plenty of ways that your stock can go bottom-up that have nothing to do with the success of a company.
There's just a few ground rules:
1. Is the company giving options? They better have a 7 year exercise window (https://triplebyte.com/blog/fixing-the-inequity-of-startup-e... ); if not, don't work there.
2. Is the company giving RSUs? Great; just realize you'll be paying nearly 50% taxes when they convert to shares. (and make sure that the company will actually pay your taxes by buying back shares when they do convert!)
3. Is the company super early stage? Your options are probably worth nothing and probably will amount to nothing. But if it costs almost nothing to exercise (strike + taxes), you might as exercise them now.
You pay taxes on RSUs not at vesting, but when they settle into shares. This might be shortly after vesting; it might be delayed until an acquisition/IPO. (generally it is delayed for companies far away from IPO).
The delay causes multi-year income to be batched into a single year. With a progressive tax system, that results in your money being taxed at a rather high marginal tax rate: If you have a substantial amount you vest a year, it's easiest to use the highest marginal bracket as a conservative guess of what you'll be taking home. In California, that's somewhere on the order of 48% combined state + federal.
I would never accept options from any startup. I will only accept shares if I know and trust the founder(s) or if there is a way to cash out early.
The last startup I worked for full time for 2 years added a clause to my contract which allows me to sell my shares as part of each capital raise that they do.
Over the past few years since I left, I've had two opportunities to cash out. The last one looked pretty decent but I trust the founders so I decided to hold. It's nice to have the choice.
If the company wants to "align incentives" with employees, then they should offer some kind of revenue/profit sharing.