Early dropbox employees have had opportunities to cash out. Same has happened for other big private startups.
This means that ISOs can probably be exercised tax free, but NSOs require you to pay taxes on the spread from strike to the fair market valuation.
If your strike price is low enough you may be able to save and afford to exercise the ISOs, the NSOs will probably be too expensive with the tax burden.
There's also a 10yr expiration on options anyway so it's possible that you could lose them even if you're waiting for an IPO while holding unexercised NSOs.
In my experience, small startup options don't get exercised because of the tax bill, not because of the strike price.
You still have to watch out for the California AMT (which I didn't know about) - it's 7% and will still trigger at the lower value. As a bonus you can no longer deduct it either past 10k from federal taxes (though that may change with the charity thing).
The ability to do early exercise on unvested shares is also often not an option at startups so when you are able to exercise the spread is higher and the tax penalty is worse.
So if you don't foresee being at the company for at least 5 year or foresee having the money to purchase the options you have accrued after the 1+ years then you are better off asking for cash. Companies of course don't like this because it costs them nothing if they pay part of your comp in options that you then leave on the table when you leave the company. This is calculated, the companies know this.
How many startups can you expect to work in your career where you stay for 5 years? Lets say you work for which would be 20 years of your career. How many of those 5 are going to actually IPO? The math suggests you leaving a lot of money on the table. If you take the comp in cash you can put that money to work for you in other ways.
Personally I've made way more from stock options than I have from wages. Google stock has appreciated 7x since I joined in 2009, so you can do out the math for various fractions of equity compensation. And this was for a company where I valued that equity at zero, because it already had 20,000 employees, it was in the middle of the financial crisis, its stock was dropping like a rock, and 89% of employees were underwater in their stock options.
You could argue that if you take cash compensation, you could then invest that in public market stocks (like GOOG etc.), and there's a pretty good argument for diversification and not holding your net worth in your paycheck. OTOH, when it's your company stock, you also have an information advantage: for example, the press was very down on Google for most of 2009, thinking that they'd tapped out on growth and the web was basically over, and after the initial post-crisis bump it basically traded sideways until mid-2012. Having seen the energy there, the products under development, and the query growth rate numbers, I knew this wasn't true, but if you'd worked for cash in another company and then tried to invest in the public markets you would've had a very distorted picture of reality.
Not necessarily, it depends on what your strike price is.
>"Google stock has appreciated 7x since I joined in 2009"
The context was startups and IPO'ing. Google is neither a startup nor were you a pre-IPO employee.
But the point I wanted to make, bringing up the Google example, is that I didn't expect Google stock to have much upside in 2009. Most people didn't expect Google stock to have much upside in 2009. Google stock still had much upside. The excitement was all in Web 2.0 startups (like zillions of other people, I founded one), but most of them had little success. We're talking about Dropbox now, but Dropbox was a desktop app startup, perhaps the one thing less cool than a big tech company in 2008.
Similarly, the common wisdom now is that startups are a losing bet and you should go ask for cash at an established company that can pay you well. Usually, in markets, when something becomes common wisdom it ceases to be true. So I will happily take the opposite side of that trade - I'm back to founding a startup, I work for equity, and if people want cash, I'll pay them in cash. I realize that I'm making a risk/reward tradeoff here and there's a fairly decent chance my equity will be worthless, but I choose to make it anyway, because I believe that at this point in time, the startup career path is undervalued.
Yes of course that is just common sense and there is nothing in my comment that suggests you shouldn't apply common sense.
>"Nobody on an Internet forum can do that for you"
Well of course not and I was not attempting to advocate for someone else. I thought this was implicit when I stated "I think ..."
The employee got what they wanted (cash for their stock).
ROFR isn't that bad. What is bad is some contracts have a call option on your stock at FMV price, even when you exercise.
What infuriated me was that I had to do all the leg work and paper work and it was only when the money for the sale went into an escrow that the company rejected the offer. So they wasted a lot of people's time unfortunately - mine, the broker and the buyers time. The companies "preferred buyer" turned out to be some Hollywood big wig. And my guess is that they never had any intention of letting my proposed sale go through.
One curious thing I learned is that although this practice of selling options on the secondary markets by "worker bees" was strongly "discouraged" because it was seen as a sign of not believing in the company, it turns out the execs were all selling their options left and right and had been doing so for years.
https://www.wsj.com/articles/SB10001424052970203833004577249...
And you can't do it in an adhoc manner, it's usually organized by the company to one buyer.
That being said, read the options agreement carefully and ensure your interests are well protected.
It's worth noting that, in nearly all cases, you will not receive an options agreement until well after you have accepted the offer.
I've never tried to ask for an options agreement prior to accepting an offer, but I'd imagine it would be a very difficult thing to get at most companies.
Point is, negotiate a salary that meets your needs, and treat the stock options like lottery tickets, because that's what they are.