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Comment by nemo44x | Hacker News Reader

Capital gains taxes. When the "fair market value" of the company increases away from your strike price, when you exercise your options you have to pay tax on the difference between your strike price and the fair market value. And it will be a short term capital gain so it isn't cheap. If those .20 options of your have a fair market value of 5.00 now, you will owe tax on 4.80 of capital gains. 4.80 * 100,000 is 480,000.00 and a tax rate of about 40% on that means you will owe $192,000.00 in taxes to exercises $20,000.00 in options. So you will need around $210,000.00 to get out.

And even after that you're holding a non-liquid asset which could be diluted to nothing or the company could simply fail and you can't dump the stock.

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Then, simply don't exercise your options--you won't have any taxes to worry about.

So if you don't exercise your options, then why take the pay cut and work twice as hard for a startup ? The whole thing reeks of a scam against early employees.

Exactly.

As the article states, you typically have 90 days after leaving a company to exercise your options or you lose them entirely. Yes, that avoid taxes, at the risk of eliminating any potential upside.

You have a choice though. The exercise price + taxes is the price you pay for potential upside. Not willing to take that risk? Just walk away from your options and pay nothing.

If that's the truth and the employee's best guess as to the company's outcomes are that their options will either be worth nothing or the taxes will be too expensive to afford with the cash available to him, the employee should rationally value any option grant at zero. Startups may find it a little hard to recruit employees if everyone starts valuing options at zero. This isn't in anyone's interests.

That's my argument exactly. Employees should value illiquid stock options at close to (but not exactly) zero. They're assets that have potentially huge upside, but also the risk of ending up worthless, cannot be sold now, and have no guarantee that they will ever be sellable. A rational decision maker would value such an asset at close to zero.

I'd argue that it's in the employees' best interest to realistically value the equity portion of their compensation package.

*if that employee doesn't have sufficient liquidity to take the risk.

This is another case in the world where having money helps you make money. I think most people rationally understand that it often takes money to make money, but the startup scene is usually portrayed differently.

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