There’s no mention of Qualified Small Business Stock, QSBS. If you are early on, this is more important than 83b or early exercise although more difficult to manage.
>proceeds of the original and the new investment are treated as long term capital gains [...] if the proceeds stay in a QSB for more than 5 years, the whole thing is tax free
Excellent point, Chris. Founders should consider giving out RSUs instead of options for this reason. My understanding is that stock options do not count as Qualified Small Business Stock, however.
You have to exercise that option first and then you have stock. That it is subject to a repurchase agreement (vesting) is a separate matter. QSBS is hard to achieve but the reward is much greater than 83b.
Basically formation needs to be engineered with QSBS in mind. And you have to be early, pre-$50M. And ....
My problem has always been that startup pay is often below market and when you are already making below market, shelling out $20k to exercise is prohibitive. In my case that would mean spending more money than I put on the down payment of my house or pay for a year of my kid's daycare.
With that said, if you can afford it it is a great way to lesson the tax blow in the event of an exit.
I'd be curious to know about this. Do you or someone have more information?
Every company I've been at it involves writing a check to the company unless the company is public. I don't know why a bank would take on the risk on a private company.
Just to be clear, though I'm sure it won't shock anyone, the article is very US specific and therefore it's entirely likely that parts of the advice will not carry over into other tax jurisdictions.
I only comment this as I had assumed it was a more general article than dealing with the tax specific aspects of options.
Btw, if your employer haven't used eShares Inc for cap management, they should. It's much more streamlined with the electronic stock certificates and exercised (no messy paper trials to keep!)
80% of startups fail and 20% succeed in some fashion. Which means if you normally make $50,000 and take a $5,000 paycut to work there you will lose $20,000 over the 4 year vesting period in salary.
80% of the time when the startup goes bust you make 0 on equity and still lost money due to the paycut. For a total of 8x20 or $160,000 loss.
The two times you are successful you make 2xEquity.
This means your equity has to be at least worth $80,000 each time you succeed.... just to break even with salary.
Factoring in the risk of your equity being 0 you should be getting a LOT more equity.
It's very similar to calculating expected value in poker.
Really great article. I hope the government repeals the AMT tax as expected in the coming tax cut bill. You are right that there is little material out there for resources.
https://www.andersentax.com/services/for-private-clients/bus...