What happens to options when leaving a startup?
Leaving the job at the startup soon. Have around 20000 options that were granted to me with strike price around 0.4 USD. What happens to all that when I leave? Gone like the paper money it is, or I can still hold on to it? Or do I need to exercise them? Please guide. New to this.
You have to exercise within some duration or you loose them. Assuming they are all vested that is $8000! Plus taxes depending on the FMV and option type. If all are vested you probably stayed for 4+ years which means the FMV will be non trivial. Startup stocks can be sold on private market via sharespost.com type sites
How is the FMV determined?
Your employer will provide it. It is the current worth of your company’s share. If you think your company will have a successful exit; exercising makes sense. If you don’t believe in your company’s future, check sharespost for anyone buying or selling
For tax purposes, if your company allows you to early exercise your options, you should do so. You can early exercise all of your options based on the original strike price when issued. If you leave before you are fully vested the company will reimburse for the the diff. Once you early exercise you will want to file an 83b with the IRS. This will show that you bought the shares at the original strike price when issued and you will not have any tax implications until a liquidity event happens.
In this person’s case, I’m not sure the early exercise matters. If they are planning to leave there is no point to early exercising. But for other still at their company, early exercise with an 83b can be a great benefit, if it is an option.
If you are not fired, you usually have 3 or 6 months to buy your options at that strike price. If you are fired, it’s normally reduced to only 30 days to buy your options.
The difference between options and say, RSU’s, is that an option is an offer for you to purchase (or exercise) shares of stock at that strike price. Your option agreement will have something called an exercise window, which is the length of time you have after leaving the company to purchase those shares. In many startups it’s often 90 days, but I’ve seen windows up to several years long. It’s up to you to decide whether you want to purchase all or some of the shares, but based on your option grant and strike price it’ll cost you $8,000 to exercise all of them ($0.40 x 20,000), and then there will be some kind of tax implication based on the appreciation value between when you were granted the options and the current valuation of the company. I would consult a tax advisor if you’re worried about how it will affect your filing next year.
Thank you for the detailed explanation. Quite helpful. Couple of follow-up queries: 1. How is the strike price determined? And what causes it to appreciate in value - valuation rounds while raising money? 2. How easy or difficult is it to dispose (sell) those shares if I buy the options?
Yeah as the other commenter said — FMV (fair market value) is underwritten and generally determined by some multiple of revenue or assets or what the investors think they stand to earn on their investment. Companies are required to go through the valuation each year and file IRS form 409A to determine it. Carta has a decent write-up going into more detail here: https://carta.com/blog/what-is-a-409a-valuation/ To your second question — liquidity events are rare outside of IPO or acquisition. A company may aim to stay private for a long period of time but hold a secondary offering in partnership with an outside firm as a means to provide some of their vested employees a way to cash out some of their equity. During the secondary offering, a deal is struck with an outside investment firm to purchase up to some maximum number of shares of employees’ _vested_ stock at an agreed upon price. There may also be limits imposed on employees like a maximum percentage of vested stock that they’re able to sell.