Comment by thaumasiotes | Hacker News Reader

Comment by thaumasiotes | Hacker News Reader

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What does the tax treatment look like? I'm aware of the following:

1. Get options, pay nothing.

2. Exercise options, pay AMT.

3. Sell stock, pay capital gains.

(Please point out anything missing; it's missing because I don't know about it.)

Assume that the timing of step 2 is nondiscretionary and the stock price is temporarily depressed when it occurs.

Assume that you have to pay the AMT by selling some of your stock until you've sold enough to cover the whole AMT.

If the AMT is a lump sum (seems... unlikely?), then the depression in the price at the moment you have to pay it is bad for you.

If the AMT is a percentage of the value of the stock (my guess?), then by the assumption that you have to pay for it by selling stock, you're going to lose a fixed percentage of your stock no matter what the current stock price is.

If we relax that assumption and you take out a loan to pay the AMT, the depression in the stock price is good for you, because you end up making a profit on holding your shares while they recover.

In step 3, you sell your stock at the "natural" price. I guess that since the stock was temporarily depressed, it's now higher and you pay a capital gains tax on the difference. Is the tax rate higher or lower than the rate you paid for the AMT? If it's equal, what difference did the temporary depression of the stock price make?

Fun fact: You have to pay AMT on exercise even if the stock cannot be sold in the open market. Usually this means dipping into ones other savings. It hurts even more than you are paying AMT on fictitious valuations (if the company is not public yet) and you really can't be sure if they will ever go IPO

Even if you can’t sell the stock directly you can effectively sell options for someone else to buy that stock from you at IPO.

I haven’t looked into this myself, but I recall reading about someone doing this when their options where about to expire in a relatively hot but still far from IPO startup.

I have heard of 'second market', but how would one go about doing this? Do they create private contracts and such for a non-yet-listed company?

My understanding is the ‘secondary market’ is normally based around people selling actual shares and you’re required to have approval from the company before you can sell shares on secondary markets.

The company can do this for the same reason they can force employees to wait six months after IPO to sell their shares, it’s in the contract you sign when exercising your options.

Which is why selling options is a loophole…

You don’t sell options, you obtain financing to exercise options, with said financing backed by the converter stock produced from the options you’re exercising. Terms are fucking _brutal_, but when you’ve spent a decade at a company with no exit in sight, your hand can be forced. Hence why there’s a market for this.

Brutal terms, but they can be terms where if the company fails to IPO you aren’t in debt. It’s just a question of how much risk you want to take on vs how much upside you need to give up.

Worst case you can always exercise whatever portion of your options you can afford and accept the inherent risks for doing so.

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