How to assign stock options in early-stage startups

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Exercising options and selling stock have complex tax implications. Then there are the rules with respect to long-term or short-term capital gains.

You should always consult with an accountant before making big decisions about how to handle options but the option exercise and sale calculator here can give you a good guess. As you can see if you play with the numbers, the exercise cost can be pretty significant if you join a startup at a high valuation.

This can exercising options startup a problem if you decide to leave or are terminated. Most option plans allow days for options exercise. Here is a story worth repeating. One of my companies wanted to hire an exec from a large private company. He had joined three and a half years earlier, contributed significantly and now wanted to move on to the exercising options startup thing.

Because the company was private and because of transfer restrictions in exercising options startup option agreement, it was nearly impossible for him to find a way to exercising options startup liquidity or borrow based on his significant stake. In the end, he chose to stay at the company.

He is still there, more than a year later. The company is still private. This exercising options startup one of the many reasons why joining startups early, when it is cheap to do an 83b electioncan make the difference between making a lot of money and having the flexibility to change jobs and making a bit of money or having job flexibility.

Follow simeons or subscribe to my blog to get notified about new startup tools. Have a comment or a suggestion for a new startup tool? Your accountant can help with that.

The result depends on too many other variables. The fair market value FMV of common stock is determined by the board with or without a A valuation process. Here are some tips: Consider the cost of option exercise and the risk of losing that investment when you change jobs, both for the company you are leaving and the one exercising options startup are thinking about joining.

Make sure to get an ISO grant. NSO option grants are much worse than ISO option grants because the difference between the fair market value and the strike price of the options is treated as exercising options startup and is subject to income tax in the year of exercise. Board members and advisors get NSOs. This is one of the reasons why it can be much easier to recruit them early, when the price of the common is very, very low. If you have the leverage, negotiate an extension to the period you have to purchase your options.

Or the board can simply do it because the CEO goes to bat for you. Think exercising options startup about the value you can deliver during a transition period and beyond. Have a succession plan.

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A terrific story, but unfortunately, not all stock options have as happy an ending. Stock options can be a nice benefit, but the value behind the offer can vary significantly.

There are simply no guarantees. How should I think about stock or equity compensation relative to my total compensation and any other savings and investments I might have? Employee stock options are the most common among startup companies. At the end of the second year, more shares will vest. Restricted stock grants which may include either Awards or Units provide employees with a right to receive shares at little or no cost. As with stock options, restricted stock grants are subject to a vesting schedule, typically tied to either passage of time or achievement of a specific goal.

Keep in mind that the vesting of restricted stock grants is a taxable event. This means that taxes will have to be paid based on the value of the shares at the time they vest.

Your employer decides which tax payment options are available to you — these may include paying cash, selling some of the vested shares, or having your employer withhold some of the shares.

This is a fairly complex area related to the current tax code. Therefore, you should consult your tax advisor to better understand your personal situation. The difference primarily lies in how the two are taxed.

And resulting gain or loss may qualify as long-term capital gains or loss if held more than a year. Non-qualified options, on the other hand, can result in ordinary taxable income when exercised.

Tax is based on the difference between the exercise price and fair market value at the time of exercise. Subsequent sales may result in capital gain or loss — short or long term, depending on duration held.

Tax treatment for each transaction will depend on the type of stock option you own and other variables related to your individual situation.

For specific advice, you should consult a tax advisor or accountant. When it comes to employee stock options and shares, the decision to hold or sell boils down to the basics of long term investing. Is my portfolio well-diversified based on my current needs and goals? How does this investment fit in with my overall financial strategy?

Your decision to exercise, hold or sell some or all of your shares should consider these questions. Many people choose what is referred to as a same-day sale or cashless exercise in which you exercise your vested options and simultaneously sell the shares. This provides immediate access to your actual proceeds profit, less associated commissions, fees and taxes.

Many firms make tools available that help plan a participant's model in advance and estimate proceeds from a particular transaction. In all cases, you should consult a tax advisor or financial planner for advice on your personal financial situation. It is great to have confidence in your employer, but you should consider your total portfolio and overall diversification strategy when thinking about any investment — including one in company stock.

There is no single answer to this. If a company remains private, there may be limited opportunities to sell vested or unrestricted shares, but it will vary by the plan and the company.

For instance, a private company may allow employees to sell their vested option rights on secondary or other marketplaces. In the case of an acquisition, some buyers will accelerate the vesting schedule and pay all options holders the difference between the strike price and the acquisition share price, while other buyers might convert unvested stock to a stock plan in the acquiring company. Again, this will vary by plan and transaction. You should also consult your financial planner or tax advisor to ensure you understand how stock grants, vesting events, exercising and selling affect your personal tax situation.

We're using cookies to improve your experience. Click Here to find out more. Entertainment Like Follow Follow. What types of stock plans are out there, and how do they work? How do I know when to exercise, hold or sell?

What are the tax implications? What are the most common types of employee stock offerings? Two of the most common employee stock offerings are stock options and restricted stock.

How do I know whether to hold or sell after I exercise? How much of its stock should I own? I work for a privately-held startup.

If this company never goes public or is purchased by another company before going public, what happens to the stock? I still have a lot of questions. How can I learn more?