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While you're right that exercising options can be very expensive and are a risky tax bet, we're talking about employee #2 in this case. They should've been able to buy in early at a low price and tax bill if they really believed in the company:

- Jan 2021: 3M seed round

- Jan 2024: Series B valuing the company at 500M

That's 3 years of vesting below a 1B company valuation, and 75% of a typical vesting schedule. There was plenty of opportunity to buy when valuations were low.

There's also 83(b) election that allows one to prepay tax liabilities on stock options before they vest.

Not buying stock options or doing a 83(b) election is also a bet that can place a cap on losses if the company goes downhill, but the risk flips if everything goes right.

I encourage you to put yourself in that person's shoes. It is never a simple decision.

Yes, there is plenty of opportunity to exercise when valuations were low. But that also means you're buying before there's clear evidence that the company will be successful. It also still means you're out the cash to exercise the options before there's a market for those options and before you know that the company will actually go public and not crater for whatever reason. You also have no idea how much your shares will be diluted.

Yes, exercising on day 1 optimizes your outcome in the case of a successful exit. But it is absolutely comically a poor choice for the 95% of cases where your equity ends up being worth next to nothing.

IME the real issue is people don't know what or how to do it. If you're a pre-seed employee, you're going to be able to exercise 100% of your shares for a minuscule amount of money. But you need to know what to do and do it right away.

In other cases, you may be later but have a higher strike price (expensive-ish to exercise), but its at least close to the valued price and in that case you can exercise without a major tax hit. But again usually people learn this after the valuation goes up and there's no way to go in reverse. So best we can do is share information here I guess, and perhaps advocate for some kind of regulation.

I'm speaking from experience. Yes, it means buying in before there's clear evidence of success, that's the risk! The lower the risk the lower the reward.

Waiting until the company is worth billions of dollars before buying its stock is one of several options available, and each has its own risk/reward profile.

My point is that exercising the company’s stock early is fraught with risk and is in almost all cases a -EV play.

Yes, the option technically exists. But without perfect foresight it’s not a good option. It’s not even an okay one. It’s an exceedingly bad one in most cases.

Acting like this employee was silly for not dumping a huge sum of money into company shares before it was in a position to succeed is flatly ridiculous.

Stock options are—as they currently stand—a lottery ticket that startups dangle in front of people’s faces that allow candidates to believe they will get fairly compensated for their labor, but with so much wiggle room that the company rarely has to ever make good on it. And I also say this from personal experience as employee. I was an employee ~#600 of a unicorn that went public. I ended up in something of the sweet spot of equity: most of the people who joined before me left before me and got less than I did in the end. Most people who joined after me got less equity at a worse strike price than I did.

I did pretty good. And this was a rare raging success story. Most people did worse than me.

> Acting like this employee was silly for not dumping a huge sum of money into company shares before it was in a position to succeed is flatly ridiculous.

Once again we’re talking about employee #2, exercising early would not have been that expensive! They had access to a strike price and low tax liability that the vast majority of later employees would ever see. You are correct in that most shares in startups are worthless, but that’s orthogonal to exercise price and tax consequences.

The calculus changes if/when the company becomes a unicorn, but by then the risk profile is much more favorable than when it was a scrappy startup, and returns are lower.

> I also say this from personal experience as employee. I was an employee ~#600 of a unicorn that went public. I ended up in something of the sweet spot of equity: most of the people who joined before me left before me and got less than I did in the end. Most people who joined after me got less equity at a worse strike price than I did.

Well one has to stay long enough to vest in order to keep the equity, being early isn’t enough.

I don’t know your specifics so maybe you did make it out better than earlier employees, but some tricks companies use once they hit unicorn status (and have hundreds of employees) is stock splits. They want to pad their share grants for newer employees to make it seem more attractive and make the strike price lower. Of course earlier employees that exercised and left get their shares multiplied too.

> Once again we’re talking about employee #2, exercising early would not have been that expensive!

Exercising early almost certainly would have cost hundreds of thousands of dollars. For employee #2 of a startup, you’re almost certainly already working for mostly equity and not salary.

You are high as a kite if you think it’s reasonable to dump large sums of money into a five-person company while getting paid peanuts in return.

Without details we’ll just have to agree to disagree, but exercising options is not an all-or-nothing affair and can be done with a budget in mind.

A -EV investment like early-stage startup equity is still -EV for every incremental dollar spent. Paying upfront for equity whose terms can be rewritten out from under you with zero input is not smart from any angle.

You’re basically criticizing the guy for not having perfect foresight, when the real issue is that startup equity is trivially manipulable by upper-level management. It’s a carrot they can dangle in front of people while only rarely having to pay even a fraction of what was promised in the rare event of a profitable exit.

You want to say exercising options. Buying options is paying to have an option; you can easily buy options on publically traded stocks, for example. Exercising options is delivering money that covers the strike price to receive the shares... or delivering the shares to receive the strike price, if it was a sell/put option (which employment related options wouldn't be)

Sure, but I'm not really clear on what that has to do with the situation described?

And he calls them vested shares though, not vested options, though maybe he's incorrect.

And it's not like you forfeit them instantly after leaving anyways. You usually have at least 90 days. And the fact that the value of the company is so much lower now is favorable, if you think the value will recover.

But again, none of this has anything to do with the "1% payout" here that is still totally unexplained.

It’s possible that in the Google deal you had to agree to sell back the shares (at a low value like par or original strike price) and the 1% refers to either those proceeds or the size of the Google employment package. If you didn’t agree then you would be left holding your shares of a company that is now gutted.

> It’s possible that in the Google deal you had to agree to sell back the shares

But how could Google require that?

> If you didn’t agree then you would be left holding your shares of a company that is now gutted.

Which is what is sounds like he wound up doing anyways? Which I don't even understand why.

Google can just refuse to hire you if you don't

I've literally never heard of a company demanding you give up shares in another company as a precondition of being hired, for an engineering role.

At the executive level they may not want you holding shares in a direct competitor because it presents a conflict of interest. But even then you generally have a period to divest.

Can nobody explain what the actual demand was here? What did Google offer vs. what did they demand, and why? And why would Google be buying your shares...? None of this makes any sense the way it's been presented.

How would they even know if you were still holding those shares in another company? This scenario is pure fantasy.

Doesn’t income happen when you sell the shares ? What is the cost basis of the shares you purchase if not the strike price of the option ?

AMT income happens when the option is exercised (vests and paid for), the difference between the value and the strike price is income at that time. The AMT cost basis is the value at that time ... or you can think of it as the strike price plus the amount of income.

At the same time, if it's an ISO option, there is no assessment of ordinary tax until the stock is disposed. If there's a merger and the proper forms are followed, you can be issued stock from the acquirer that retains the basis (the strike price) of the original shares. If the forms are not followed, the acquisition is a taxable disposition.

There's a credit for the difference between AMT tax and ordinary tax on ISOs, but it can take many years for that to fully work out, and you have to have paid the AMT in the meantime.

Early exercise with 83(b) at time of grant (or while the value hasn't changed) or exercise-and-sell make the taxes make the taxes simplest, but tax simplicity isn't always the best strategy.

https://taxsharkinc.com/when-are-vested-shares-taxable/

Its different for vesting. Othrrwise even more toxic greed and tax avoidance would occur.