Options vest, but you have to exercise them to purchase the underlying shares. This is nominally cheap, but from the IRS’ perspective you have just spent $1 to purchase a share worth $100, so that’s $99 of income. Multiply by a large number of options and you can easily have a real multimillion dollar tax bill even though you have no way to sell the shares to recoup their value.
Worse, if the company loses its value before you can sell, you’re still out those taxes with zero recourse. It’s an enormous risk.
If you leave a company with vested but unexercised shares, you generally forfeit them.
- 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.
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.
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.
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.
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.
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.
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.
Its different for vesting. Othrrwise even more toxic greed and tax avoidance would occur.
