[brianfitz]

That might seem like the common sense answer, but is the danger in exercising options and holding them. In this case, the previous poster was correct -- once they forgive the loan, the $25 million becomes taxable income.

The reason it doesn't seem to make sense is that no actual value was gained in the end. However, the IRS (and our tax laws) don't see it that way. Instead, they back at the value that was gained at the time of the transaction. They don't care what happens to the value in later years.

[sjg007]

No I mean the stock is collateral regardless of its value. If it was worth more than $25m she would sell it. But it's not so you just give it back.

[brianfitz]

As stated before, it doesn't work that way. Google the horror stories on those who have excercised options (and held the stock) on a liquidity event who had to pay taxes on gains that existed at the time of the transaction, but later dropped in value. Even though they never saw a gain other than on paper, they get hit with a tax bill they can no longer afford. And the stock is unhelpful because it's current market value is no longer reflective of what it was at the time the IRS recognizes the gain. In your scenario, she could only cover her tax bill with the stock if it were at a equal or higher value as when she excercized them via the loan: https://blog.wealthfront.com/exercise-stock-options-taxes/

[sjg007]

That's not a risk if you early exercise at the time of grant where your strike price is equal to 409A price. Then there is no taxable value.

[brianfitz]

We can agree to disagree. As a two time founder, I had to go through a lot of discusssions with our legal and even my own to grasp the upsides and downsides of what Elizabeth did by trading risk against a lower future tax liability. My take is that you're confusing a normal cashless transaction versus a structured loan as an executive of the company to purchase stock today to hold for a long term horizon. The risks are very real and the liability is very real. I meant this to be a way to share some specialized knowledge I have on the subject to answer why she has an actual liability and why this isn't handed out to just any employee. This isn't coming from book knowledge, but real working knowledge of this arrangement. But at the end of the day, everyone is free to do their own research. :-)