I paid $300K to quit a startup | Hacker News Reader

I paid $300K to quit a startup

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19 pointsenigmatic0215 comments

The vast majority of candidates below the VP level will not be successful in negotiating the exercise window. Certainly not a startup past the seed round.

Also this title is clickbait, no one forced this person to pay anything. Walking away from equity for free is always an option that some people take.

Know several people below VP who negotiated extensions. Never hurts to ask especially if the cash difference can be life-changing

This article is wrong in some significant ways. If you buy out incentive stock options (ISO’s) within 90 days of leaving, then that’s not a taxable event. You will not end up paying regular income tax on the paper profit. That’s a large point of the benefit of receiving ISO’s.

Now - you may very well have to pay Alternative Minimum Tax (AMT), as AMT rolls in some otherwise non-taxable transactions into the calculations, this being one of them.

The real kicker is - let’s say you do pay AMT on the paper gains, and then the stock tanks later - you can’t claim that as a loss on your taxes. You can take a credit for the excess that you paid in AMT, but you can only take that a few thousand dollars at a time. So, OP could be in a situation where the shares eventually sell $0.01 in the money, so they would re-earn their $100k investment, but effectively lose the $200k AMT bill (if that’s accurate).

Additionally - you actually can not negotiate to extend the expiration of your purchase option after you leave, because it’s codified in IRS regulations. Companies CAN choose to let you have longer, but then the options become non-qualified stock options, and lose some of the benefits of ISO’s, primarily the non-taxability of the exercise event.

We offer 10 years exercise period for leavers at Supabase, hopefully it becomes the new norm

Isn’t the whole point of options really to keep people from quitting? You don’t have to pay a tax bill unless you exercise them, but if you wait for your company to get acquired you’ll get cashed out for a net positive (assuming your shares are “in the money”)

Then why have vesting as well?

Because the cliff keeps them from quitting during the first year. If there was no cliff and vesting started immediately, the exercise window wouldn’t help much, since there would hardly be any options to exercise. But after the cliff, since 25% have vested, suddenly the exercise window becomes a reason not to quit.

Why do startups offer options instead of RSUs? Is it just so people let them lapse and the company keeps more stock?

If a startup issued RSU’s, then every vesting event would trigger income tax in that year, which employees would have to pay out of pocket, else they would be forced to sell their illiquid pre-IPO non-preferred shares in some secondary market to pay the tax bill.

This would also make every employee into an actual shareholder as of their first vest, and startups really hate having lots of shareholders, because it generates a ton of administrative overhead and paperwork. In fact, if you reach 2000 shareholders, you have to start filing SEC reports as if you’re a public company, which nobody wants to do.

Don't options vesting also trigger an income tax event?

I didn't think about the limits of total shareholders. Doesn't that mean if 2000 employees got made at their employer they could deliberately trigger SEC oversight by exercising the options?

Exercising NSOs generates taxable income on the difference between the exercise price and the Fair Market Value (FMV) as determined by the current 409A valuation.

Exercising ISOs does not generate taxable income nor immediate capital gains when the option is exercised, but you will generate capital gains in the future on the difference between the sold price and the strike price when you sell your exercised options. If you are higher income, which is common if you work for a startup on the product and engineering teams, the difference between the strike price and the FMV when exercising the option counts towards AMT calculations.

It's common to pay AMT when exercising ISOs but you do generate AMT credits that can be used in future tax years when your taxable income and capital gains are below the threshold for triggering AMT.

Carta has a great article on ISOs vs NSOs that goes into more detail: https://carta.com/blog/equity-101-exercising-and-taxes/

So, should I expect that a first hire likely has options and a founder started with stock? Is there any reason a founder wouldn't just start with a percentage of the company.

I believe founders will own a percentage of the company outright as recorded in the cap table.

tl;dr: when you leave a company, you generally have a 90 day expiry on your options. If you exercise, in some jurisdictions (like the US), you also have a tax burden.

Some more forward thinking companies (including mine) offer 10 year expiry on options.

Slightly clickbait title, but important reminder.

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