[zmillman]

I've been hit with this too and it's not pretty at all.

If anyone else is concerned about this, you should talk with your CEO/legal team about early exercise options which can remove a lot of the risk of massive tax liabilities. From my understanding, some companies offer an early exercise option where you pre-purchase the shares and then instead of being able to buy the shares after they've vested, the company instead gradually loses the right to buy them back at the original strike price.

I'm not a tax lawyer, but Google "section 83(b) election" and you'll find more information.

[kentonv]

What you're describing is called "restricted stock" (not to be confused with "restricted stock units", which are entirely different). The idea is that you actually buy the shares upfront at the current 409(a) (legal) valuation, but the company has a right to buy them back if you leave. Founders usually get their shares this way, because at the time of founding the valuation is essentially zero. Early employees may take this route too, but usually the company switches over to options after a funding round forces a non-negligible valuation. Some companies (like mine, at least so far) continue to let new employees choose.

The amount you would pay for restricted stock is exactly the same as what would otherwise be your strike price for stock options, assuming the same number of shares.

For an employee, the major down side of choosing restricted stock (assuming non-negligible valuation) is that if the company fails and the stock ends up being worth nothing, you don't get that money back. Whereas with stock options, you have more time to find out if the stock will be worth anything before you buy into it.

The up side is possible tax advantages, but of course I cannot give tax advice.

(All this is information I've learned while being the founder of sandstorm.io; I am not an expert in these things.)

PS. Don't forget to file your 83(b). (Any time you say "restricted stock" to a startup founder, they will instinctively reply with "Don't forget to file your 83(b)".)

[jalonso510]

You can also sometimes early-exercise an option (if the company authorizes it when they make the grant), which ends up being in practice a lot like buying restricted stock while still technically an option, and I think that's what the parent was referring to.

[kentonv]

Weird, what is the reason to do that instead of restricted stock? It sounds functionally identical except more complicated and with possibly worse tax implications.

I'm sure there's some silly accounting reason having to do with option pools and cap tables.

[jalonso510]

Well since it's an option, the recipient has the choice to either exercise or not exercise, and they can early exercise at any time they'd like, not just on day one, so it's more flexible for the recipient.

On a restricted stock grant, the recipient has to either pay for the shares on day one, or the company gives them to the recipient for free and the recipient incurs a tax liability for the value of the stock on day one.

[scurvy]

You can 83b options, too. It's not just restricted stock.