[CaveTech]

If you use your options and the company goes under before IPO, are you effectively shit-out-of-luck? Seems like you would get $0 for the shares but already paid taxes on them. Would you get those taxes back in a future refund if this were the case?

[dragonwriter]

> If you use your options and the company goes under before IPO, are you effectively shit-out-of-luck?

"Goes Under" can mean different things, if it is failing and bought out, you get whatever it is bought for.

If it is dissolved (either in bankruptcy or otherwise), you get whatever the claim against assets in dissolution provided by your shares entitles you to -- which in bankruptcy is likely nothing, because creditors come first, and if there was going to be something left after that, the firm wouldn't be dismantled in bankruptcy.

> Seems like you would get $0 for the shares but already paid taxes on them.

I'm pretty sure you'd have a capital loss from the difference between the value finally realized from the shares and the price at exercise, which is applied against any other capital gains in the same year (and, with limits, against other income, with the excess carrying over to the next year, etc.)

[mschuster91]

> which in bankruptcy is likely nothing, because creditors come first, and if there was going to be something left after that, the firm wouldn't be dismantled in bankruptcy.

Bankruptcy might also be caused by a few debtors being excessively late in payments, and you have your own debts to pay.

If e.g. my debt of 10K is due at 30.07., and I have 100K outstanding from my customers (and not enough cash flow/reserves to cover), then by 30.07. I am bankrupt, and it may well happen that at 30.08. my debtors pay the 100K - but then it is too late for me.

[encoderer]

The taxes owed after exercise are actually under AMT. It is an AMT credit that carries forward equal to the tax paid that can be used in the next year where your conventional tax liability exceeds your amt liability. Any unused portion carries forward.

But it wasn't always this way. After the bust in 2000 lots of people owed real tax liabilities despite no real financial gain and had to pay them off. The credit came later.