Comment by jbkp | Hacker News Reader

Comment by jbkp | Hacker News Reader

You know, it's funny, I read things like this from time to time: "so if I have 0.5% of company and it gets acquired tomorrow for $100 million dollars, will I get $500,000?" and I remember that I am in this exact scenario, and have no idea what the answer is. I've been an employee at a startup for 2 years now. I joined when I was young, naive, and broke — I don't even remember if I read the paperwork before signing it.

Does anyone have any advice for how to go about learning more about employee options? I realize I sound dumb, but better late than never.

Some questions I've always had but have been too afraid to ask:

- How does one exercise their options?

- What taxes are there and when do you have to pay those?

- In the above scenario, what factors are involved in me actually getting that $500k?

- What questions aren't I thinking of because I don't know enough about any of this? For example, I've never asked about my options since signing the paperwork: was there something I would have had to do already that I haven't, and will likely screw me in the future?

P.S. Throwaway for anonymity (because I am embarrassed to have to ask!).

I've exercised before. Typically, you email hr and say, "I want to exercise"; they send you some paperwork which you fill out; you write the company a check. DO NOT DO THIS BEFORE UNDERSTANDING TAX CONSEQUENCES. You will typically pay tax on the spread between strike (your price per option) and the fair market value (fmv) which is set by the board and often updated quarterly. This can also be a backdoor way of a board tightening those golden handcuffs; if you where early enough the taxes may well exceed the strike price. You should also be able to get the fmv by asking. Keep in mind these shares you're buying may well be completely illiquid and the irs wants their taxes right now anyway.

A numerical example: 20k shares with a strike of $0.11; fmv of $0.39. Then I write the company a check for 2e4 x 0.11 = $2200 dollars and report income to the irs of 2e4 x (0.39-0.11) = $5600 (for amt).

A nuance is if the company is succeeding, it can be worth it to buy options when they vest; it starts the clock ticking on long term capital gains and can roughly half your tax bill if and when you can actually sell the share. Which reminds me: you will pay taxes twice: once when you exercise the option to turn into a share, and again when you sell the share. If you are lucky enough to go public the company will often get a firm that handles all this for you and just gives you a check net of all taxes.

A good accountant will cost $500-ish (or less) to go over your situation in detail. It's worth the money. If you already pay ab accountant, not someone at hr block or similar people who just know how to fill out paperwork, they may go over your situation for much less money.

Also, you must understand amt; that can bite hard. If you don't understand amt, see that accountant.

And be sure the accountant knows what he's talking to. I did that and it was still fail, because they didn't understand ISO+AMT Tax Trap.

As someone who's lived through this, immediately (as in the same hour you purchase the ISOs) sell the ISOs. All of them. Take the short-term capital gains hit. The alternative can and will destroy you.

Going for long term capital gains will only destroy you if the stock falls, which can happen in any investment.

If there is enough confidence in the stock, a happy medium can be to sell enough ISO's at the time of exercise to cover the tax cost for that year. However, if the stocks you have are a massive % of your overall (potential) wealth, short term tax on a big # is still better than long term gains on a volatile #.

> Typically, you email hr and say, "I want to exercise";

What happens when they ignore all emails related to exercising? I had this problem and I even followed up by CCing the controller and CFO. It turns out they didn't want anything on "paper" so they just ignored me. My offer had the options in it, but they never gave me the option paperwork. I hear they finally granted the options a year ago to people still there. I think they were playing games trying to lower the FMV or something. I'm not sure it was all legit.

1) Go talk to HR for the documents relating to your specific situation. This is not something that will be threatening to HR.

2) Take the documents to an attorney for advice on how to proceed.

> I am embarrassed to have to ask

No reason to be embarrassed. You don't know something. There is always something you aren't going to know. Also, the smartest people are the ones that always ask questions. They are not satisfied accepting things, they seek to understand. And that means saying "I'm ignorant of this. Teach me."

Anyways, I'd ask whoever handles this for your company. Whether it's your founder, CEO, HR, or whatever department depending on the size. Someone is handling this for them, and I guarantee if you don't understand it, someone else doesn't either.

And, if the company hasn't made clear the value of what you have, then they aren't benefiting from it. After all, if you knew that if the company succeeded, you'd get $500k for it, you might want to work harder. What's the point of an incentive if it doesn't incentivize.

assume you'll end up with nothing, because you probably will. Or maybe you'll be able to eat a few nice dinners if you are lucky. If you are being paid under-market, leave ASAP

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