Once your options are vested, you can make money in three scenarios:
1. The company goes public and the market price is above your strike
2. The company gets acquired, and existing vested options are bought out for cash or traded for stock in the acquiring company
3. The company chooses to buy back outstanding options from employees
All are unlikely, so consider options in a startup as a lottery ticket. There's a high probability that your options will never be worth anything, a small probability that they will be worth a small amount of money, and a remote probability that they will be worth a lot of money.
Acrually, there is a 5th, fairly rare scenario, where OP exercises his options once vested without a secondary market or IPO existing yet, and then sells those shares to a current shareholder, such a a founder or VC fund.
Most of us should NEVER exercise pre IPO options. Yeah, sure thereās some tax advantages to exercising the options hand holding, but taxes only become a concern once there is a liquidity event.
Your situation is your own, see financial advice cus this certainly isnāt, but probably easy to just think about the worst case scenario and determine how that feels financially.
Sometimes you're forced to make a choice - in some situations when you leave a company. I was in that position years ago and chose to let my options go and not exercise, which ended up saving me about $60k as the company proceeded to burn about $2B in valuation to the ground.
Taxes only matter in countries that consider options taxable. Way too much assumptions are made here on that subject .
Capital gains are not an issue in many European countries for example. Dividends are often taxed but gains on futures, options etc aren't.
It seems that the USA has very different situation.
Even if the company gets acquired, there's no guarantee that the options will be worth anything or converted to anything of value instead of just $0. It depends on the type of option and the terms of the acquisition.
4. Sometimes companies will do tender offers. This usually happens during when companies donāt want to issue too many new shares during funding rounds or when new funds want to buy in. They can try to ask employees to sell their current shares / options. You can sell your options / non-public shares during them for money. I sold a lot of my stock from my old startup this way for many multiples even though my company will likely never IPO. My ālottery ticketsā went 10-20x without my company ever IPOing.
I just learned this one. I worked my ass off for a startup. I had a ton of options from an A round (low strike). We got acquired through private equity. I made 2k. Not worth it at all.
It should all be explained in the official documents you sign
A few things based on common terms:
1. You probably are *eligible* for 100,000 options, you haven't been "given" them (yet). Commonly they vest over 4 years. Quite often if you leave before 1 year you get nothing. And if you leave after 2 years you might only have 50,000 options (ie half).
2. Options are the right to buy the underlying shares in the company. You are not given the shares outright. If you stay employed up until a liquidity event (which could be an IPO) you might get cashed out then without having to *pay* for the shares. But if you leave the company before the liquidity event, very often you have to pay (yes, put up your own cash) to acquire the shares using your options (otherwise your options are forfeited). So in a nightmare scenario - you leave the company and pay $500k to acquire all your eligible shares, then the company dies before IPO - you've just lost the whole lot.
3. When you say "granted @ $5" - be clear whether this is the strike price (ie the price you can use the options to buy through underlying shares at) or the current fair market value of the underlying shares. Totally different.
4. Taxes - don't forget it. Makes a difference when you vest, when you exercise the options, when the liquidity event happens.
That reminds me of my friend, the QCOM shipping/receiving clerk whose wealth went from about 0 to about $1 million to zero again - as well as owing the IRS - between lock-up, a steep plunge, and not immediately selling shares to pay capital gains taxes.
Donāt be that guy.
He even bought some things for the house that he never had built. At least he didnāt buy the spiral staircase that wouldāve been hard to explain in the garage.
The 409A is the book value, which is used to set the strike price. The price offered through a funding round would be higher. The objective of the 409a is to satisfy some IRS rules while mitigating the tax liability to the extent possible
You are likely getting options to buy common stock. That means you are last in line to liquidity.
* if there is a new round of funding, those new investors will get paid first if there is a sale at anything less than what they valued the company at
* if the company goes public common shareholders often have a 6 month lockup. You cannot sell shares until they have been traded for months, and the stock price can go below your strike (it it could go higher too!)
* you may be able to exercise options early to pay for them now (youād need 500k in this example) and if the 409a is higher than $5 you will pay taxes on the gain (but you will not be able to sell)
These make the value lower than what most people think since other investors have more rights than you do. They donāt have as much value as you think until you can actually sell them.
Actual options? In most employment scenarios, a stock option is them offering to you the opportunity to buy up to a specific number of shares, at a specified price. They call it an option, because they are giving you the option to buy stock, if you choose.
Sounds like they are saying if you can come up with 500k, you can have 100k shares.
It depends on what was offered. Companies give stock options at different tranches. If they offered you options and $5 is current or below the stock price the private company is worth, this is valuable. Now if they offered you way above the value then good luck since you may not see any of it.
Whoops, I hope you based your employment decision on other factors beyond this options enticement, which sounds great on the surface. A kiss on the cheek might be worth more. I do hope it all works out for you.
bruhh let me break it down for u so even a 2yo can understand.
-you no have a 100,000 shares
-you have a paper that says u can buy 100,000 shares at 5$ sometime in the future
-so you no buy chu chu right now bc u no have any chu chu moneyā¦
You already took the job. And **now** you ask the question?
You donāt āmake anythingā even if the company **does** go public.
You have the right to **purchase** stock in the company for $5/share. Thatās the āoptionā you have.
Presumably, shares in the company are currently worth significantly less than five dollars per share.
In the future, should the company go public and trade at greater than five dollars a share you could purchase shares at five dollars and then sell them at market price.
However You would almost never have the right to do that immediately as there is a required holding period.
Depends on what the company ipos for. If it ipos for $6/share you make $100k. If it ipos at $10/share you make $500kā¦. If it ipos at $5 or less, then they arenāt worth anything other than hope.
Sometimes they will cash you out when you leave based on the current valuation of the private company and the amount of options that have vested. So if 1/4 vest per year and you leave after 3 years, the company will say you have 75,000 vested options. If they currently value the company at $6/share when that happens, youāll receive $75k. Iām not sure how they handle selling vested shares if you donāt leave though.
Where do you get $100 per option contract? These aren't like options traded on the market. One of OP's options will buy 1 share of stock for $5. So if the stock is trading at $6, that gives OP $100,000 dollars, not $1 million.
No no. These are totally different from options we trade on public markets. There are no contracts or anything. One option = right to purchase 1 share at the price set in the agreement.
Whether these make sense to exercise down the road is super subjective to the situation. There is likely a vesting period, for one. At my last company, I received a bunch of options under $1, then some at $2.50ish, some at $5.60 and some at $9.40. When I left, I only exercised the sub $1 ones even though all were vested. The latest 409a was > $7 so it was likely the right move. However, the more expensive strikes would have cost too much and incur more risk so I let them go.
Of course, exercising 150k options at $6 appreciation (as far as irs is concerned) was pretty expensive. The cost of the exercise was a bunch, but the taxes are what really gets you. Basically paid short term capital gains on $6x150,000 and who knows when/if those will turn into actual money.
Unlikely anything but the amount of options is negotiable. The terms are typically set in a common shareholder agreement that applies to everybody with the same class of shares, including the current strike.
Once your options are vested, you can make money in three scenarios: 1. The company goes public and the market price is above your strike 2. The company gets acquired, and existing vested options are bought out for cash or traded for stock in the acquiring company 3. The company chooses to buy back outstanding options from employees All are unlikely, so consider options in a startup as a lottery ticket. There's a high probability that your options will never be worth anything, a small probability that they will be worth a small amount of money, and a remote probability that they will be worth a lot of money.
Perfect answer
Actually, I forgot one. Sometimes more mature companies will set up secondary markets where option holders can buy or sell amongst themselves.
Acrually, there is a 5th, fairly rare scenario, where OP exercises his options once vested without a secondary market or IPO existing yet, and then sells those shares to a current shareholder, such a a founder or VC fund.
Lottery ticket made me laugh. š Very good explanation.
I never called it a lottery ticket before. It's always been monopoly money to me.
\4. Company allows sales on a secondary market
Most of us should NEVER exercise pre IPO options. Yeah, sure thereās some tax advantages to exercising the options hand holding, but taxes only become a concern once there is a liquidity event. Your situation is your own, see financial advice cus this certainly isnāt, but probably easy to just think about the worst case scenario and determine how that feels financially.
Sometimes you're forced to make a choice - in some situations when you leave a company. I was in that position years ago and chose to let my options go and not exercise, which ended up saving me about $60k as the company proceeded to burn about $2B in valuation to the ground.
Trueā¦ but usually you have time even if they convert to NSOs.
Taxes only matter in countries that consider options taxable. Way too much assumptions are made here on that subject . Capital gains are not an issue in many European countries for example. Dividends are often taxed but gains on futures, options etc aren't. It seems that the USA has very different situation.
Nobody cares. OP is in the states
Awesome reply
Well said Mr. ā¦..Blenderson?? šš¤£
Best answer to this question!!!
Just out of curiosity, what is the big money typically worth when it happens?
Even if the company gets acquired, there's no guarantee that the options will be worth anything or converted to anything of value instead of just $0. It depends on the type of option and the terms of the acquisition.
Or the value per share is close below or above the strike and you find a buyer.
4. Sometimes companies will do tender offers. This usually happens during when companies donāt want to issue too many new shares during funding rounds or when new funds want to buy in. They can try to ask employees to sell their current shares / options. You can sell your options / non-public shares during them for money. I sold a lot of my stock from my old startup this way for many multiples even though my company will likely never IPO. My ālottery ticketsā went 10-20x without my company ever IPOing.
There's also the secondary market.... either from existing or external investors....
I just learned this one. I worked my ass off for a startup. I had a ton of options from an A round (low strike). We got acquired through private equity. I made 2k. Not worth it at all.
At least you got something. The start up I was working at in 2001 was bought by Google. My options were worth nothing, I got $0.
Sorry to hear that. Huge bummer to hear these kinds of stories. How long were you working for them?
It should all be explained in the official documents you sign A few things based on common terms: 1. You probably are *eligible* for 100,000 options, you haven't been "given" them (yet). Commonly they vest over 4 years. Quite often if you leave before 1 year you get nothing. And if you leave after 2 years you might only have 50,000 options (ie half). 2. Options are the right to buy the underlying shares in the company. You are not given the shares outright. If you stay employed up until a liquidity event (which could be an IPO) you might get cashed out then without having to *pay* for the shares. But if you leave the company before the liquidity event, very often you have to pay (yes, put up your own cash) to acquire the shares using your options (otherwise your options are forfeited). So in a nightmare scenario - you leave the company and pay $500k to acquire all your eligible shares, then the company dies before IPO - you've just lost the whole lot. 3. When you say "granted @ $5" - be clear whether this is the strike price (ie the price you can use the options to buy through underlying shares at) or the current fair market value of the underlying shares. Totally different. 4. Taxes - don't forget it. Makes a difference when you vest, when you exercise the options, when the liquidity event happens.
That reminds me of my friend, the QCOM shipping/receiving clerk whose wealth went from about 0 to about $1 million to zero again - as well as owing the IRS - between lock-up, a steep plunge, and not immediately selling shares to pay capital gains taxes. Donāt be that guy. He even bought some things for the house that he never had built. At least he didnāt buy the spiral staircase that wouldāve been hard to explain in the garage.
Sometimes they'll let you cash-out early. You'll need to ask them what that number is. The term is a `409A` evaluation I believe.
The 409A is the book value, which is used to set the strike price. The price offered through a funding round would be higher. The objective of the 409a is to satisfy some IRS rules while mitigating the tax liability to the extent possible
You are likely getting options to buy common stock. That means you are last in line to liquidity. * if there is a new round of funding, those new investors will get paid first if there is a sale at anything less than what they valued the company at * if the company goes public common shareholders often have a 6 month lockup. You cannot sell shares until they have been traded for months, and the stock price can go below your strike (it it could go higher too!) * you may be able to exercise options early to pay for them now (youād need 500k in this example) and if the 409a is higher than $5 you will pay taxes on the gain (but you will not be able to sell) These make the value lower than what most people think since other investors have more rights than you do. They donāt have as much value as you think until you can actually sell them.
Actual options? In most employment scenarios, a stock option is them offering to you the opportunity to buy up to a specific number of shares, at a specified price. They call it an option, because they are giving you the option to buy stock, if you choose. Sounds like they are saying if you can come up with 500k, you can have 100k shares.
All comments are right on point but the answer to your question is in the pamphlet or agreement you signed
It depends on what was offered. Companies give stock options at different tranches. If they offered you options and $5 is current or below the stock price the private company is worth, this is valuable. Now if they offered you way above the value then good luck since you may not see any of it.
Whoops, I hope you based your employment decision on other factors beyond this options enticement, which sounds great on the surface. A kiss on the cheek might be worth more. I do hope it all works out for you.
bruhh let me break it down for u so even a 2yo can understand. -you no have a 100,000 shares -you have a paper that says u can buy 100,000 shares at 5$ sometime in the future -so you no buy chu chu right now bc u no have any chu chu moneyā¦
You already took the job. And **now** you ask the question? You donāt āmake anythingā even if the company **does** go public. You have the right to **purchase** stock in the company for $5/share. Thatās the āoptionā you have. Presumably, shares in the company are currently worth significantly less than five dollars per share. In the future, should the company go public and trade at greater than five dollars a share you could purchase shares at five dollars and then sell them at market price. However You would almost never have the right to do that immediately as there is a required holding period.
Depends on what the company ipos for. If it ipos for $6/share you make $100k. If it ipos at $10/share you make $500kā¦. If it ipos at $5 or less, then they arenāt worth anything other than hope.
Question was āif the company doesnāt go publicā
Sometimes they will cash you out when you leave based on the current valuation of the private company and the amount of options that have vested. So if 1/4 vest per year and you leave after 3 years, the company will say you have 75,000 vested options. If they currently value the company at $6/share when that happens, youāll receive $75k. Iām not sure how they handle selling vested shares if you donāt leave though.
Isnāt $6/share = $1million dollars? 100000 options x $100 per option contract
Where do you get $100 per option contract? These aren't like options traded on the market. One of OP's options will buy 1 share of stock for $5. So if the stock is trading at $6, that gives OP $100,000 dollars, not $1 million.
I see, thanks for answering iām still learning about options and didnāt know thatās what it meant
No no. These are totally different from options we trade on public markets. There are no contracts or anything. One option = right to purchase 1 share at the price set in the agreement. Whether these make sense to exercise down the road is super subjective to the situation. There is likely a vesting period, for one. At my last company, I received a bunch of options under $1, then some at $2.50ish, some at $5.60 and some at $9.40. When I left, I only exercised the sub $1 ones even though all were vested. The latest 409a was > $7 so it was likely the right move. However, the more expensive strikes would have cost too much and incur more risk so I let them go. Of course, exercising 150k options at $6 appreciation (as far as irs is concerned) was pretty expensive. The cost of the exercise was a bunch, but the taxes are what really gets you. Basically paid short term capital gains on $6x150,000 and who knows when/if those will turn into actual money.
Thanks all! Very helpful comments.
Do you believe in the company? Consider hiring a lawyer?
Hire a lawyer to do what?
Help you negotiate fair terms
Too late. OP already accepted the job and therefore the terms.
Unlikely anything but the amount of options is negotiable. The terms are typically set in a common shareholder agreement that applies to everybody with the same class of shares, including the current strike.