[throwaway1124]

I appreciate the thinking here and message but am concerned about this line "This will cost a few hundred dollars at most".

Clearbit has raised a $2M seed round from top-tier investors implying a post-money valuation likely over $6M. A conservative FMV of the common shares would suggest a $1.2M valuation. To exercise a 0.5% of total equity grant would cost $6,000. Something doesn't add up here.

If I am correct, will Clearbit help its employees exercise their options?

See: https://www.fenwick.com/publications/pages/playing-with-fire...

[beambot]

I believe it depends on how they raised the seed round. If it's $2M in debt (with a $6M cap), then technically the value of the company has not been determined yet -- and won't be until there is a proper priced round. This affords them some flexibility... but they still need to determine the Fair Market Value of the options.

[throwaway1124]

Even if they raised a convertible note or pure debt (which is atypical of a First Round Capital led round), it is unlikely that their 409A led to an extremely low FMV. Even a company that raises $2M in debt at a $6M cap would likely have a common share valuation over $500K.

Source: I'm a previous founder of a startup that raised a $1.5M convertible note and have done a 409A valuation based on it.

[zaroth]

I think the problem is with your $1.2M valuation. You have a company with $2m in preferences or debt which is first in line before any common stockholder, and most likely their liquid assets are less than $2m, and they have negative net income. That makes the common stock effectively worthless at this time.

Also, if you keep reading;

  Once our valuation rises and the cost becomes prohibitive, we’ll move to an
  extended exercise period model instead, where you will have 10 years to
  purchase your options. By that time we’ll either have had an exit (in which
  case you can do a cashless exercise), or we will have arranged some other
  form of liquidity.

[throwaway1124]

I'm not suggesting that the valuation is truly worth $1.2M but if they did a 409A valuation or had their board decide on the FMV to determine strike price, the value would be at least 15% of the post-money valuation. My point is simply that if they've issued a reasonable number of options (over 0.25% of the total authorized shares), there is no way that their employees would only pay a few hundred dollars to exercise.

In an extended exercise period model, there's still the issue of Alternative Minimum Tax on exercise or long-term vs. short term capital gains. There will also likely be lockups on those shares whether inherently built in or in an eventual IPO.

[hkmurakami]

This is likely convertible debt/equity so the company hasn't been valued in the manner of a traditional priced equity round. You can use other valuation methods to determine a much lower 409A valuation.

If they say "several hundred dollars", this is likely coming from actual knowledge of their own 409A valuation number.

[blazespin]

Yeah, if you're handing out 50 basis points to all of your employees. you would rapidly run out of equity to give out. I think paying a signing bonus of 6K to those who you do hire at 50 basis points (maybe with reduced salary spread out over 4 years) is not out of the question.

[technotony]

Yes, and the tax on that is a fraction of that... which is a small cost compared with cost of recruiting. remember the cash from excising the options goes back to the company so it's not really a cost (you just have to pay tax)

[JonFish85]

Does one end up paying double taxes in such a case? Because you're "getting" the money to buy the stock and then immediately buying the shares--is that first step technically income?

[russell_h]

The taxes aren't double though. A highly simplified example:

  1. Your company gives you $1400 to exercise options (I don't think Clearbit is doing this, to be clear)
  2. You pay $400 in taxes and early exercise $1000 of options in exchange for 1000 shares at $1 each
  3. Later you sell those 1000 shares for $1m total

At step 3, you will pay capital gains tax only on the $999,000 of actual gain. You don't have to pay taxes again on the original $1k.

[loumf]

It would have to be (meaning the first step is income)

[throwaway1124]

I agree. I think that in the earliest stages, startups should consider "bonus-ing" out the employees to exercise their options early. I'm wondering what the consequences/disadvantages would be for the startup.

[loumf]

It could aid recruiting if they explain the value of this benefit. In the longer term it probably reduces retention of people that had to stay to keep options from expiring.