Option exercise is broken
A computer science graduate, I’ve never really enjoyed working for a big corporation so since graduating Cambridge I’ve always worked in start-ups.
A few years ago I was working for a start-up which I so fortunately joined as fourth employee. The job came with an option package and together with a few bonuses here and there I had about a million options at the time. I still recall the share prices of the funding rounds quite vividly: $0.34 per share, $0.66 per share, $1.75 per share and later even $4.50 per share. A great start of my career, I thought, being 23 years old at the time.
How things changed when I wanted to leave…
I decided to leave the company because I was ready for something new. I figured I had my options and I would exercise them at some point, but never precisely understood how that works (who has the time to read all that legal anyway). As it turned out, I had about 90 days to exercise my options after leaving the company or would otherwise lose them. Not only that, I would also have to pay about $2.8M of income taxes.
Wait, what? Yes — I would have to pay $2.8M of income taxes on a security that I couldn’t sell and on income that I’ve definitely never seen in my bank account. I explored various avenues for getting this funded, but couldn’t find anyone who could help me and none of the banks would lend against private stock. I still left the company (life is too short to work somewhere you don’t love anymore) and lost the equity.
When I dug further, I found out that this is a much bigger problem in Silicon Valley.
Option exercise is complicated
I wasn’t alone in not understanding my equity and the tax implications of exercising my options. I found that the US tax system especially the part revolving around options is extremely complicated. Even worse, there exist no accurate tools which help employees navigate the option jargon jungle. I would find a few tools here and there but they would always be “not tailored for the individual” or contain huge caveats such as “don’t forget about Alternative Minimum Tax when exercising your ISOs”.
The benefits of exercising
Yet option exercise can be hugely beneficial:
- Benefit from capital gains. Any future upside on your equity is taxed as long-term capital gains instead of ordinary income. The tax savings can be as much as 25%.
- Get rid of exercise deadlines. Even though companies have generally improved and extended the amount of time employees have to exercise, options have deadlines whereas shares have not.
- Avoid automatic conversion. If you have Incentive Stock Options (ISOs), they will automatically convert into Non-qualified Stock Options (NSOs), 90 days after you have left the company. ISOs have significant tax savings when compared with NSOs
Secfi is the solution
I decided that what the market needs is better products to understand startup equity and better financial products for those with private company stock. At Secfi, we aim to be the company that helps employees and shareholders of late-stage private companies before they are wealthy with:
a) understanding what they have and giving an overview of the different options available to them; and
b) innovative financial products which help them realize their goals sooner and better.
We’re launching three products today:
- Option exercise tax planning. A tool that calculates the exercise cost and associated taxes based on individual’s tax situation, including ordinary income, alternative minimum tax, and other taxes associated with option exercise.
- Option exercise financing. Our financing covers the entire exercise cost and taxes associated with exercising stock options.
- Shareholder loans. Private company stock loans — for each $1 of equity value we can “lend” $0.33 to holders of private company stock of growth and late-stage private companies.
Start with a free tax assessment at Secfi.com!
Looking forward to working with you.
Founder & CEO, Secfi Inc.