How do new grads exercise stock options when it's super expensive ($80k)
By - mrapplepie15
They are probably worth $0, I wouldn’t worry about them.
This only happens at a liquidity event, such as acquisition.
you ever seen Breaking Bad?
Good question. Here are the most common ways that people come up with the money to pay for their ISOs:
* They save up and buy all of their ISOs outright after they vest
* They save up and buy as many ISOs as they can afford (a related move is to buy as many ISOs per year as possible while staying below the trigger point for AMT)
* They take out a loan to buy their ISOs
* They use non-recourse financing from a company like Secfi (full disclosure: I work at Secfi)
* They list a portion of their ISOs on a secondary market and use the proceeds to purchase the rest of their ISOs outright
* They wait for a liquidity event from their employer (either a pre-exit stock buyback or negotiated private sale)—these are still fairly rare
* They stay at the company until exit, where they perform a cashless exercise
Each of these options has benefits and drawbacks, depending on your personal finances, risk tolerance and the startup's growth trajectory.
Personal story: Before joining Secfi, I worked at a unicorn AI startup and decided to exercise my ISOs with cash on hand when I left the company. It was pretty painful financially, compounded by the fact that I had 90 days to either exercise the shares or lose them permanently.
Before buying them with my own cash, I listed my stock options on a secondary market, but wasn't able to successfully negotiate a sale within 90 days. Ultimately, I thought the company was on the right path for an exit, so I ended up paying out of pocket.
Your concerns are absolutely valid about minimizing upfront tax liability. Exercising some or all of your stock options when they vest starts the clock on long-term capital gains, and might even qualify for you QSBS tax benefits if the company is small enough.
That said, startups are historically risky endeavors, and by the time most people feel comfortable that the company is very likely going to get acquired or go public, the cost to exercise their stock options is very high.
Disclosure: I work a Secfi, which provides stock option education and financing.
I'm not an expert on options but it seems like your understanding is incorrect.
When you exercise your options, you are just buying the stock. You only pay taxes when you have a capital gain, which happens when you sell. So waiting shouldn't matter unless the option strike price is changing over time for some reason.
>You only pay taxes when you have a capital gain, which happens when you sell.
not always, AMT can totally fuck you over if you aren't aware of it and be responsible for 6-figure tax bills
the TL;DR version of AMT is that you **do** get taxed on paper gains (even if you haven't sold yet)
Til. I read the wiki on it and it sounds alike as long as you don't exercise the options you don't trigger those tax events.
Depends on if they are Incentive Stock Options or Non-Qualified. With the latter you owe taxes on the unrealized difference between the strike price and the share price from the latest valuation.
Personally, I would just go to the bank and get a cashiers check from my account, but that's the nice part about being a new grad at 42.
None of your comment makes sense or is helpful.
If it costs you money it means they are out of the money and you shouldn’t exercise them
They always cost money because the shares can’t be liquidated yet. You are paying the strike price to convert an option contract into stock that can’t be sold.
Then it doesn’t have value.
Pretty much the story of private stock options. Exerciser beware.
However if you call it right then you get to pay capital gains instead of ordinary income tax.
Not true. Say you have options at a Series A valuation of 5 bucks a share. A series B happens and the valuation doubles. Let’s assume for simplicity there’s no dilution. If you exercise your stock options, and they’re not ISO (incentive stock options), then you pay 5 bucks a share for shares now worth 10 a share, and you pay income tax on that five dollar difference per share, despite your inability to liquidate those shares. If the company IPOd at 20 a share, you’d end up paying income taxes on 5 dollars and capital gains taxes on 10 dollars when you sold.
Someone downvoted me who doesn’t understand how start up options work. Rough.
If the company IPO is a huge if. Around 75% of VC backed tech startups fail so right now they’re worth nothing
Nope, you owe the taxes even if you buy it and it later goes to 0. Sucks.
We’re talking taxes, not whether it will be worth anything. If you had stock options from before a company doubled, then you exercise the options, you pay income tax on the difference now. If it later goes to 0, then ouch, but that’s irrelevant to the tax conversation we’re having.