How do I play my Stock Options at a Unicorn?

New druggs
Feb 9 33 Comments

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)

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TOP 33 Comments
  • Fitbit tlead1010
    I feel like OP is confused at what he's getting exactly.
    Feb 9 0
  • Spotify KXAo87
    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
    Feb 9 3
    • Quanergy Systems Hshruduxhe
      The downside is you may trigger AMT
      Feb 9
    • Spotify KXAo87
      I think trump neutered amt
      Feb 9
    • Squarespace yh3yc1
      AMT is still a thing, it just has a higher exemption now.

      I used to only be allowed $10k with of phantom income a year, now it’s around $30k.
      Feb 9
  • Dropbox thrwaway88
    Take a loan against your house. Ask your family for money. Borrow from your 401k.
    Feb 9 2
    • Indeed / Eng imgod
      And then watch everything to go to 0.
      Feb 9
    • Dropbox thrwaway88
      Nah, that never happens. Things only go up.
      Feb 9
  • Squarespace yh3yc1
    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.
    Feb 9 4
    • eBay / IT
      manorama

      eBay IT

      BIO
      Coder
      manoramamore
      Is AMT credited back in the later years , for the private companies? Heard there is AMT credit for previous years if you exercised private stock options
      Feb 9
    • Squarespace yh3yc1
      Yes, the AMT can be used as a credit for the capital gains taxes later when you sell the stock. If you sell for less than the exercise market price, you don’t get it back though.
      Feb 9
    • eBay / IT
      manorama

      eBay IT

      BIO
      Coder
      manoramamore
      Do you know why AMT is credited back at first place ? First AMT is paid as marginal tax, and later you get it back . Does it mean technically we pay no taxes on private shares ?
      Feb 9
    • Squarespace yh3yc1
      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 12
  • SocialChorus The Kid
    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
    Feb 9 1
    • eBay / IT
      manorama

      eBay IT

      BIO
      Coder
      manoramamore
      But this is only possible if you stay with the company during IPO or liquidity . Otherwise you will either have to let go options or exercise within 3 months of termination
      Feb 9
  • New / Eng sparked
    You 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
    Feb 9 0
  • You 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?
    Feb 9 4
    • New druggs
      OP
      I can't afford all my options
      Feb 9
    • Salesforce yesyesoq
      Dude, you only need money to buy options when you leave. As far as I know.
      Feb 9
    • Dropbox pu5h33n
      It’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.
      Feb 9
    • Google weebay
      Don’t buy every year. Save up to buy in some other vehicle. Who knows maybe the company ranks by year 5...at least you haven’t paid for a bunch of worthless options already
      Feb 10
  • Marin Software xOCX31
    Go talk to a tax pro. This is easy for them
    Feb 10 0
  • New DvVM00
    lol. sooo many people indeed did that (loans) in the 00’s and lost everything. instead of striking it rich they had to declare bankruptcy. and you can’t discharge the bill to the tax man
    Feb 9 0
  • Take-Two Interactive Software oQGP20
    Generally 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.
    Feb 9 0
  • Uber YoMama!
    The strike price seems high.
    Feb 9 1
    • Quanergy Systems sj5uq
      that's what happens at unicorns with low floats
      Feb 9
  • Facebook / Mktg Skeoskenne
    Zume?
    Feb 9 1
  • Alibaba
    madma

    Alibaba

    BIO
    Why should anyone put a bio on blind? Who is your product guy?
    madmamore
    It's option or RSU?
    Feb 9 1
  • SocialChorus The Kid
    Yes, and it is an option. All it costs the employee is done extra paperwork and possible tax consequences? Not sure about the latter
    Feb 9 0
  • New DvVM00
    that’s totally different. that’s secondary market.
    Feb 9 0
  • SocialChorus The Kid
    Not a loan. Now the company assumes responsibility, and the option holder owes nothing if things go bad. They also take a large percentage of the upside
    Feb 9 0