[beagle3]

> When my startup was acquired by a publicly traded company it was great for the employees because their vested stock turned into publicly tradeable shares overnight. Sort of like an IPO if you squint :-)

It is sort of an IPO if you squint. With all the potential downside:

I was an investor in a startup that was acquired by a publicly traded company. The deal was cash+stock, for a ~3X return on investment after a year. Not bad.

Except for SEC rule 144, which meant the stock was locked up for 6 months, during which the acquiring company dropped 50% (for reasons unrelated to this acquisition).

Had the deal been all stock, that would mean 1.5X return the day I could realize .... except that I've already paid 48% taxes (35% federal + 13% nyc) on the 3X number. So it wouldn't have been a 3X return -- it would have been COMPLETE LOSS OF CAPITAL on a successful investment - or 100% loss.

Luckily for me, the stars, dates and cash/stock percentages aligned in such a way that it ended up being a modest 20% return after taxes. But a deal such as this could end up a significant net loss. (and so can an IPO).

Luckily for the other employees and most other investors, the acquired company was located in a country that has a reasonable tax regime - in which you only ever pay taxes on realized gains, and only on the day you actually get any cash into your hands. Unfortunately for me (and a couple of other investors), I have to deal with the US tax regime.

[vtry]

This is why you excise your options early.

[beagle3]

Except .. there were no options involved. And even if there were, exercising earlier or later makes no difference.

Since shares of the acquired company were exchanged for shares of the acquiring company, the IRS considers this a tax event. Regardless of whether you have already exercised or not, as far as taxes are concerned, it is equivalent to the case in which you sold the acquired company's shares, and bought the acquiring companies shares. It also resets the clock on the "long term capital gain" counter. And being a small investor who wasn't driving the deal, there was nothing I could do about it.

(If I were in the driver seat, there is a way out: if the deal falls under the definition of ">80% stock forward triangular merger" or ">50% reverse triangular merger", then there is no tax event. But it rarely ever does - google the requirements)

Your largest expense is taxes.

I like it how all the armchair dealmakers on HN know how to navigate the tax system. Except those who actually tried, that is.

[aptwebapps]

I'm sure what you say is true, but it's seems a bit rough for it to be a tax event if you are locked out of liquidating for six months. I guess you could have hedged or something.

[beagle3]

> it's seems a bit rough for it to be a tax event if you are locked out of liquidating for six months.

Life is not fair. And the tax code is totally ridiculous.

> I guess you could have hedged or something.

A prior version of rule 144 explicitly stated that any kind of hedging is unlawful. The current revision is unclear on that. My counsel advised me against doing anything, as (in the extremely unlikely case of an SEC inquiry) my representation would cost several times the profits I would have insured. (And .. I had no reason to expect a 50% drop, practically overnight, a couple of months after the deal went through).

There's apparently complex ways to legally avoid the tax event until your profits are realized, which are worthwhile if you're a big VC or something and manage tens of millions of dollars. But they would probably trigger an audit and the IRS deciding you are cheating if you do that as an individual.

Romney can afford these things. I can't. The tax code is completely borked.

[vtry]

Have "other" people hedge it for you. This is how the big boys do it on Wall Street.

[beagle3]

Well, if you're willing to run afoul of SEC regulations, you can do much more lucrative things, like manipulate the LIBOR, provide inside information to select customers and use it yourself :)

(And what do you know - the big boys on Wall Street actually do those lucrative but not really legal things!)

[ChuckMcM]

Heh, I'm sure no pun was intended but I did chuckle, since to 'excise' is to remove whereas 'exercise' would be to take possession of. As someone who struggles daily with this type of typo I feel that pain. The humor comes from the fact that the sentence works both ways.