In your situation, the company holds most of the cards, including if you are allowed to sell your shares to another party. I would talk with an attorney to see how your share docs are structured, and then explore how to work with the company to get value for your shares. For example, they might let you sell to an investor who really wants in. Keep in mind that the funding round valuation is somewhat irrelevant to you, as that was derived from the price of preferred shares, which have more privileges than your likely common shares.
The company will be motivated to do the right thing by you, to avoid litigation and spooking current and prospective employees. You might not get all the value you might have hoped for, but likely most. Some companies also have fine print in their equity agreement that employee equity holders must get the board's approval for any sales of the company's equity prior to the stock being listed on a public exchange.
If you leave the company, you have to exercise the options typically within days , and pay not only the strike price but the AMT on the difference between the strike price and the latest per-share valuation i. I am of the opinion this exists to screw "the little guy" - becuase few employees who leave companies have the upfront cash for both options and taxes.
Don't blame the companies, blame the government that writes the tax laws. There shouldn't be any taxes due until the shares are sold, and a profit is realized, like a normal everyday stock trade.
I didn't blame anyone. I stated my perception of the issue which informs my opinion True, but also blame companies when they fail to educate their employees about the mechanics of their equity grant -- or even worse, when they obfuscate in response to direct questions on that subject.
HN discovers golden handcuffs are for the employer, not the employee Regardless of the snark in your comment, there are many many people who need this spelled out for them. Very true, but imo obviously employees here are generally deluded: Pretending otherwise benefits them and screws you. Yet another thing employees really need spelled out. All the "we are a family" bs that any company pushes is generally crap. If you fuckup in your family, you're generally not disowned.
In any company - you mess up and you can be cut If you have big enough issues to complain a lot to HR or speak disparagingly about your employer Then you need to start looking for a new position, silently. HR is not the friend of the employee, mostly. And don't forget the all-too-common practice of the hiring manager saying or strongly implying something to the effect of, "I'm a bit troubled by all the questions you seem to have about compensation, especially with regard to how much your options would be worth if you only worked here for a few years.
I really got the impression that you were committed to our mission and a good cultural fit. If the tax is actually due as a separate transaction before the payout appears in your bank account, wouldn't it be fairly easy to get a risk-free loan? Sure it's a lot of money, but isn't it 0 risk for the lender? When you exercise your options, you now hold shares in a private company, which may restrict your ability to realize the payout in various ways.
After paying a few tens of thousands for the below-market-price shares, you're the new owner of some shiny private shares, for which there is probably no market. In the future event of an acquisition or public offering, there's a chance of a payday.
You're missing the problematic part. It's when you've exercised an option that gives you a non-cash, notional "paper" or "unrealized" gain, and you have to pay taxes on that in cash. This should really be solved by letting you transfer or somehow attach the shares to the IRS at the value they "believe" they are worth in lieu of the tax on those shares.
Or better yet get rid of the whole AMT mess entirely. This is the paper value of the shares, which you must pay taxes on since the IRS considers them income. In effect, this would make the bank a defacto investor, and most bank lenders are weary of startup stock as collateral. Definitely NOT zero risk! A ROFR gives the company the right to pay the price you are being offered and acquire the shares underlying the options. A ROFR has the effect of making potential buyers reluctant to even deal with you, as the company can swoop in at the last minute and take the shares by paying what was agreed to.
So effectively, it puts the company in control of the situation, and so best to get them on board to whatever's happening. First talk to an attorney though - with this amount of money at stake, it would be stupid not to. ROFR is pretty standard for partnership businesses I'm not talking about startups, but actual businesses operating on revenue , so I'm not so sure about it having any chilling effect on negotiations.
It's pretty common and I've had no experience where it causes any issues. It's a cost of doing business when you're talking about equity in a business that has a lot of people involved. I've wondered how that works too. I'd imagine you'd need a "firm offer" equivalent of cash-on-the-barrel from a third-party for your company shares, a non-further-negotiatable-contract-for-stock-purchase-with-lawyers involved. Then the lawyers would take that to your company, and if the company buys at the negotiated price the third-party loses, and if the company passes on it then the third-party gets the shares.
You'd get the cash either way. OliverJones days ago. It's possible your options expire 90 days after you leave the company's employment, or some such thing. I suspect that's the case. It doesn't make sense to just walk away from those options, though.
Ask the company's CFO or somebody if there's any way they can buy back some of your shares at or near market price. If they can do this, or if they can let you sell them to a third party, you can sell enough shares to raise the cash to cover your tax liability and hang on to the rest. Or, maybe the company can grant you an exception to the "exercise it or lose it" rule that kicks in when you leave. You won't know unless you ask. You have some leverage. With the number of shares you have, they'll probably need you to cooperate in any transaction they carry out.
ESOFund is a possibility. But your company has to be a participant. And, they grab some of the upside and a lot of the downside. At any rate, you probably should get yourself a decent tax accountant or maybe lawyer to help you navigate this. It's worth paying for top-drawer advice. That person will know how to recommend an honest EOFund-like broker if that's the route you go. Congratulations in advance, by the way!
To clarify, if you find a buyer who is interested in buying would need to be a qualified investor , the company can exercise their right of first refusal to buy the shares from you at that price, but they cannot generally prevent you from selling. If I were in your shoes, I would probably want to have the deal lined up ahead of time before exercising.
Consider going through the CFO or CEO to see if any of the company's existing investors would be interested in acquiring some of your stock.
This has the advantage to the company of not bringing in an unknown outsider. I see further down that some companies have further restrictions beyond right of first refusal. I'd never heard of that before, but then, I'm only on my first startup where I think my options are worth anything. I approached ESOfund in the past, and did not ultimately use them, but not by any fault of theirs.
They were very professional, helpful, and knowledgeable about my options and provided very good information about my available choices, even ones that wouldn't benefit them I did extensive independent research on the decisions available and on their suggestions. I believe their mission statement is to take the risk for you, which includes AMT if necessary, in exchange for some percentage of your stock to be negotiated.
There's no risk in reaching out. If you exercise stock where the gain is difference between your equity plan and the value as of the latest A, multiplied by the number of options exercised , that counts against AMT.
If you believe in your company, or at least believe the stock will be liquid, I absolutely recommend finding a way to exercise your stock. All the better if you don't take a tax burden. I also found out there's some kind of tax thing where you can preemptively exercise options at grant time? In such a situation: California IRS hires bloodhounds to sniff this stuff out.
If you were employed in California when you were granted the options, you are going to pay CA taxes on them during exercise. I'm pretty sure that's not true. It is true that you can't just rent an apartment in seattle, call it a day, and pay no income tax. But it is possible to establish residency in a state tax haven and avoid that As always, if the amount of money is material, see a tax attorney. No, when it comes to options, it's where you were a resident when they were given to you.
Oh, apparently for NSOs. That is not true for ISOs, which the vast majority of startup employees will be granted. Accordingly, you are not subject to income tax by California even though the services that gave rise to the grant may have been performed in this state.
This covers the stock sale, but what about the liability of taxes from the exercise diff between strike price and current value? However, since there is I think by law? In both cases you're almost certain to be a resident of the state in which you were employed. Nothing I know of would require you to pay AMT to the state in which you were granted the options you exercised, but because it's unlikely for you to be a resident of a different state, it's a less interesting question.
Also, if your company takes off like a rocket, it's very much in your interest to not procrastinate on exercising vested options, because you want to minimize the AMT-taxed spread between FMV and strike. That increases the likelihood you're a resident of the state in which you were employed when you exercise.
You may be able to move to avoid the tax, but FTB will scrutinize it.More...