- Don't put call options on employee stock.
And something I wish that companies would start doing:
- Don't make vested options expire soon after the end of employment. Don't force people to take big tax hits just to buy the stock that they have earned.
The big difference here is the company is practically non-liquid and the employee is already taking a risk in working for that startup. I feel the 1 year vesting cliff alone is enough to evaluate if an employee is worthwhile and you should give the employee the full value of the vested stock compensation. Not add more gotchas to make the worth of the options even worse. If the company shares were liquid, then I wouldn't care as much.
Often over a few years you get the situation where the strike price is a good chunk over the FMV price and taxes are somewhat prohibitive compared to the probability that a liquidity event would happen. It makes the shares an actual net negative in total compensation and as a result, the open secret in the bay area is that most people don't actually exercise their stock options when they leave their companies. You get things like the ESO fund popping up in response taking a good cut of your compensation because you didn't want to pay some employees to do 20 hours of extra work a year.
Anyway overall, to an experienced employee who has stock option experience, it just makes your compensation package even less attractive and them less likely to work with you. If you show that you are willing to do this relatively minor & cheap thing, it will increase trust and make your company more attractive to work for, especially if your a non liquid company. I would really consider this as an early stage startup as a recruiting technique. This stuff is usually hidden in contracts, so I would bring up this feature of your company early on explaining the logic behind it.
How would you do that exactly? Even if you take advantage of SEC's rule permitting a private company to have 2,000 shareholders, the moment you convert those options to stock units (either restricted or open), they've got a brand new tax problem.
At least with ISO exercise you can juggle AMT taxation vs income taxation, RSUs or SUs are just straight bottom-line income.
What different tax problems would they have with people exercising later? How is it different from employees exercising their stock after vesting?
Unless your saying the entire structure is made to give people an incentive to not actually take their stock if they leave the company before a liquidity event to help avoid that 2000 shareholder stock limit?
What I'm talking about is mainly about non-liquid companies. The problems mostly go away with liquid companies.
http://www.mystockoptions.com/faq/index.cfm/catID/36274DB1-D...
When I can actually sell the options, then the price of about %5 extra in taxes (short term vs long term capital gains) is small compared to the taxation paperwork and paying for stock that has a good chance of being worthless.
If a company is liquid or soon to be liquid when I start working for them, then the extra bonus treatment of ISOs is fine and I understand putting that limit inside there, because the stock isn't worthless and I can sell it when I leave the company.
That's counter to one of the main goals of a good equity comp plan - retention. If a company goes out of it's way to ensure that LEAVING the company is painless and of low cost to the employee, retention would suffer.
This is a big difference between aligning incentives and retroactively punishing behavior you don't like.
These tension between these two points of view is the source of the consternation in this area.