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by BrandonM 3446 days ago
But wait, there's more... Let's say that you decide it's too risky to early exercise in year 1, but by year 3 things are looking pretty good and you early exercise all your options.

Let's say your strike price is $0.20, and now the FMV is $0.75, and you're exercising all 10,000 of your shares, including 2,500 that haven't vested yet. When you exercise, you file an 83(b) so that you get taxed (AMT) on the full $5,500 spread in year 3, even though you don't technically own those year 4 shares yet.

Then, you leave or get fired 3 months later. Pursuant to the early exercise agreement, the company can repurchase 1,875 shares at your $0.20 strike price, giving you $375 back. Unfortunately, AFAICT, there's no way for you to reclaim the tax you paid on the $1,031.25 spread for those 1,875 shares; you just eat it.

Yeah, this stuff is complicated, and sadly it seems to fall to each startup employee to educate themselves.
1 comments
teej 3446 days ago
Err, are you sure you can't take a capital loss on the $1,031.25 spread?

Not that I would benefit personally. I am still burning through years of capital loss carryover from ZNGA.

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BrandonM 3445 days ago
Section 4.03 of IRS bulletin 2012-28 (https://www.irs.gov/irb/2012-28_IRB/ar12.html) states, "If property for which a § 83(b) election was filed is forfeited while substantially nonvested, § 83(b)(1) provides that no deduction shall be allowed with respect to such forfeiture. Section 1.83-2(a) further provides that such forfeiture shall be treated as a sale or exchange upon which there is realized a loss equal to the excess (if any) of (1) the amount paid (if any) for such property, over (2) the amount realized (if any) upon such forfeiture. If such property is a capital asset in the hands of the taxpayer, such loss shall be a capital loss."

I'm not an accountant nor a tax expert. My layman's understanding of that clause is that (1) the amount paid was $375, and (2) the amount realized was $375, so the buyback nets $0.

Could the nonvested shares somehow be defined as "a capital asset in the hands of the taxpayer" with a cost basis of the FMV at exercise time, even though they're not technically property of the taxpayer yet? Perhaps it depends on the specific terms of the early exercise and the buyback?

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