Ask HN: Need advice on startup options

[optionadvice]

About 2 years ago I co-founded a company. For various reasons, earlier this year, my co-founder and I parted ways and came to an agreement that I would take a partial cash buyout and a percentage of the company as stock options.

According to our agreement, I was granted 166,667 stock options (3%) at a strike price of $0.089/share. The company at that date was valued at roughly $2,000,000. The board granted me a 10 year exercise window.

Fast forward to today. The company continues to grow around 20% month over month and just raised a nice Series A, with a post-money around $40m.

Did I screw up by not exercising the options earlier this year? Am I making the right choice by sitting on these? What should I do in this scenario? I honestly have no idea what the smart move here is. I have just enough liquid cash to purchase the options now, but my understanding is that I'd be taxed on the current value, which I guess would be somewhere around $1m, meaning I'd owe the government hundreds of thousands of dollars right?

Any advice on what I should do is much appreciated!

[adrianmacneil]

> Did I screw up by not exercising the options earlier this year?

Not really. At the time it was obviously more of a gamble, so it may have been a smart move to keep your money in the bank.

> my understanding is that I'd be taxed on the current value

Correct. So assuming that the FMV of the company for your common stock is about 1/3 of the 40M, and you acquired 3% of that, the government now thinks you just made (40M*0.03/3) = $400k, and they will expect you to pay tax on that as income or AMT in your 2015 return.

So unless you have a few hundred thousand dollars lying around, it's too late, don't worry about it. You still have another 9 years to wait around and see whether the company makes it big time, at which point paying tax will be the least of your worries.

[optionadvice]

Good point... I guess it's either lose $20k 9 months ago for possibly no money, or makes slightly less millions later with no risk.

[adrianmacneil]

Yup. Also, without knowing anything about the company, it was probably the right call not to exercise anyway. With a 10 year window, there is not really any incentive to exercise early, since the startup could fail for many reasons (unless you are fairly confident the company will be a massive success, in which case I guess you wouldn't have left :).

[jzila]

Sam Altman talked about this in his Employee Equity post: http://blog.samaltman.com/employee-equity. "The idea is to grant options that are exercisable for 10 years from the grant date, which should cover nearly all cases (i.e. the company will probably either go public, get acquired, or die in that time frame, and so either the employee will have the liquidity to exercise or it won’t matter.)"

Of course, that isn't advice specific to your situation, but at least it shows you a general direction you can use to guide your thinking. There are also plenty of resources online that talk about the potential tax consequences of various exit scenarios.

[optionadvice]

Thanks for the link! Reading now

[declan]

Are all your options vested? Did the company retain the right to repurchase?* Why exercise the options now? Can you afford to lose that cash if you the shares become worthless post-exercise? Can you sell or transfer your options or pledge as collateral to a loan?

IMHO you should seek advice from a lawyer specializing in this area (who is also familiar with the tax implications).

* Lawyers often tell founders something like: "Typically, the Company retains a right to repurchase unvested shares at cost upon termination of employment. During the period that the shareholder continues to be employed or otherwise provide services, the repurchase right expires according to a vesting schedule."

[optionadvice]

All options are vested. Not entirely sure. I could have afforded if I had purchased them earlier this year, but the tax consequence of buying them now is impossible it seems (everyone is saying that without an 83b and purchasing them earlier this year, I basically would have to pay the tax on the full value now). I will reach out to a lawyer soon. Figured HN would have plenty of people who had been there before and willing to give some brief advice/info.

[loumf]

One thing to ask an accountant about:

The Series A price might not be the one to use. They paid for a different class of stock than you have, with probably a lot more privileges and therefore a higher price. You might be able to base your valuation on whatever the internal company valuation is (probably being done by the company to set future strike prices) -- especially if what you have is an option on common.

Even so, I would personally not exercise (I am not an accountant) because 10 years is probably enough of a window.

[lostdog]

Right, the funded valuation is different from the valuation the IRS cares about, the Fair Market Valuation (FMV) or 409a. The amount of AMT you owe is determined by the FMV, which probably hasn't risen much if at all, so you may still be able to spend only the cost of the shares.

That said, $15k is a lot to throw at something that will probably fall apart in the next 9 years.

[mallyvai]

Hey - founder of http://offerletter.io here - some thoughts, in no particular order.

My first thought is, get a lawyer and accountant, immediately.

My second thought is, yes, you kind of screwed up. Generally if you have the opportunity to early-exercise + 83(b), you should take it if you can afford it - it's far, far cheaper in virtually every case, especially for the really early stage.

In terms of forward action, you have a few options:

1) Do a full (or partial) exercise with your own money, pay AMT on the spread

2) Take a loan from someone to help finance the full or partial exercise, let them offset your risk in the short term.

3) See if someone (probably an investor, or your former co-founder) is willing to buy your stock back (probably at a discount)

4) Do nothing and see what happens over the next few months/years, and only take (a potentially much more expensive, but also much more certain) once the company is reaching some liquidity event (or lack thereof).

Here's a more comprehensive blog post on startup equity: http://www.offerletter.io/blog/201412-understanding-and-nego...

Also, even though they're not "your" lawyers, per se (they are the company's) you should still reach out to the company's legal team to understand your options. And if you have a good, open relationship with the cofounder and/or board, then you have a lot more latitude in terms of next-steps as well - if they're doing well they can nicely ask an investor in a subsequent round to give you some liquidity should you desire it.

If you really believe in the company, it may make sense to exercise now and pay the taxes, but if doing so requires a meaningful portion of your net worth, you'll have to make sure you understand you're putting a lot of eggs in one basket. You would basically be going in on an asset that is opaque, and statistically failure-prone. But if you believe in it, it may be worth it. Maybe.

Drop me a line [ mallyvai at offerletter dot io ] if I can be helpful here more specifically too.

No easy solutions - all have tradeoffs - but it's definitely a manageable situation. Disclaimer: I am not a lawyer or accountant, this is not intended to be formal legal or tax advice, etc etc.

[optionadvice]

Yeah I kind of figured I made a bit of a mistake... It wouldn't have been fun but I could have afforded to lose $20k earlier this year (buying at strike + paying tax then). Now, with the value of the company in the tens of millions, I'd be looking at somewhere around $100,000+ in taxes, which I certainly do not have :\

I'll reach out to my former partner and legal team. We're all on good terms and I still give advice, direction to the engineering team when they need it.

Thanks for the input and offer to follow up. This is why I keep coming back to HN :)

[loumf]

> it's far, far cheaper in virtually every case, especially for the really early stage.

Except if the company fails, which is a very common case (especially when you have to guess at the early stage).

[optionadvice]

forgot to mention the grant date was back in January... not sure if that matters or not