Working in startups, your pay is always split somehow between salary and “stock options.” If you don’t know what that means — basically an option gives you the option to purchase a share of stock at a low “strike price” of the company. If the company does well, the price of the stock goes up, and if it does really well the nitty gritty details that can make the purchasing of the said stock through the option become less painful to think about. Trouble is, most companies, even good companies, aren’t Facebook or even LinkedIn. So exercising options early could mean to big losses down the line.
There are some tax reasons to exercise options early. From my understanding, if you have ISOs (which I do), you can buy the stock options up front, before they’re vested, and wait a year to sell them at capital gains tax rates. That is, if in a year, or after a year, they’re worth more than they were when you bought them. And that only really makes sense if your company goes public — the odds of a startup going public are very, very small. More likely, even if your successful, you get acquired. And as I experienced at my last startup — an acquisition, even when the founders do well, might not result in a great turnout for the rest of the employees.
So most of my instincts are telling me it would be silly to exercise the options now. Why not wait? Well, my company is likely raising additional funding soon, which means the value of the option will go up. While I’ll still be able to buy the option for the lower strike price, I’ll have to pay tax on the difference between the strike price and the value when I buy the option, which could be quite a lot, especially given that I’d be PAYING for the option and owe money on it. And there’s still a decent chance that eventually it will be worth $0.
Now, I could exercise a portion of my options – take a little risk, and wait on the rest – but it’s not clear this makes sense either. There is a whole issue with AMT that I don’t understand (anyone want to explain this to me?) that you can avoid if you exercise early, so says the Internets. I’m not sure at what point you hit the AMT issue in terms of your yearly gross income.
Besides all of that, the reality is that I don’t really have the $20k I’d need to purchase all of my stock options right now. Well, I do have it — I have $130k in random investment accounts — but I don’t know if it makes sense to pull my funds from any of them to exercise my options. It’s a huge risk. It might be better from a tax perspective if, in a year or a few years we get acquired, but who knows if that will happen. I do believe in this company (which is rare) so that says a lot. Still, I’m relatively risk-adverse when it comes to money. Hmm. What do you think I should do?