I recently got approved for a significant amount of stock at a tech unicorn.
It should make me a multimillionaire however there's a few problems.
The vesting period is 6 years. And the strike price is 10-30$. I can't afford all my options. Do people take out a loan or the span of 5 years?
I'm also unsure when the company will IPO, it may be 5+ years. How can I purchase all my options if I can't afford them?
(Company is not Uber, but they have a similar issue)
- The upside of exercising early is you can do long term cap gains. The downside is paying money and taking on risk.
You should look at when the options expire, some do after 4 years which would force you to exercise (or lose the options) on that timescale
- Unless your company allows early exercise, you can only purchase your options as you vest.
Say your option is $1 per share
Current market value is $10 per share in a year when you exercise and buy the share
There’s an AMT tax when you exercise and “earned” on the $9 “income”. Not only do you have to pay $1 for the share, you have to pay $9 x ~25% tax when you exercise.
The only way to get out of it is to sell within a year after you buy, so pretty much whenever the IPO happens or there’s a liquidity event when someone else is willing to buy those shares off of you.
This is why people have the “golden handcuffs” at many unicorns.
- When you exercise options before IPO, you are buying private shares. The private shares will always have a current market value unless you’re soo early stage that the value is 0.
Current market value - strike (purchase) price = potential amount to be taxed for AMT
You’re not always guaranteed to get it back in the situations where you sell for less than the taxed value. Definitely speak to an accountant and figure out your exercise plan if you need to.Feb 120
- Take a loan against your house. Ask your family for money. Borrow from your 401k.
- Just exercise at the liquidity event.. IPO or sale. Then you don't need any capital. Yes, you will lose money on taxes, but who cares.. sounds like you have plenty. Companies can take a downturn at any time, you never know. Imagine if you put up all that money, and then the unicorn starts to die... It happens all time. I mean buying some, making a calculated investment with money you can lose, fine, but don't put it all on the line, just to save on some taxes down the line
- New / EngsparkedYou don’t need to exercise your options immediately; most options for start ups that I’ve seen come with a 10 yr expiration. I would suggest not exercising until IPO at which point you can exercise and sell enough to cover purchase and tax liabilities. Exercising options before IPO is risky business as there is no guarantee they ever become more than Monopoly money. The only benefit of exercising early is gap gains vs. income tax based on time frames
- New SuckerborgYou lost me. If it’s 6-yr vesting period, then you get 1/6 each year. If it’s options you don’t have to exercise. If it’s RSUs, it gets taxed when granted to you.
What’s the problem here?
- Dropbox pu5h33nIt’s good to plan ahead so that you don’t get trapped by golden handcuffs. Buy what you’re comfortable with each year. Don’t resort to desperate measures like borrowing to exercise. Ask if they can offer extended years to exercise when employees leave. Also ask for more cash comp lol you can’t live on illiquid ISOs.
- Take-Two Interactive Software oQGP20Generally how options that are liquid are exercised is:
1. You give your company the check when you are ready to exercise
2. They hold the check until a short time after you receive the stock
3. You sell at least enough stock to pay for the options you just bought.
Alternatively, save up a bit each month so you have cash on hand to exercise some or all of the options.