Comments on: On startups – option packages, vesting, triggers, acceleration, and taxes

By: Lloyd Budd

Lloyd Budd — Thu, 08 Feb 2007 03:40:57 +0000

Very informative! Such clarity on what was in one of my experiences an awkward topic. This article is one that I will definitely refer back to. Thank you!

By: Bruce Brumberg

Bruce Brumberg — Tue, 30 Jan 2007 01:53:12 +0000

Scott, Sorry I missed it from my quick on screen reading. You might want to consider adding the terms “restricted stock” and “restricted securities”. The first is the type of stock you get when you go ahead and exercise these “early exercise” stock options. The options have switched to actual shares at exercise. The are restricted, meaning you do not fully own them outright, until the vesting on them occurs.

Of course, you cannot sell them because they are “restricted securities,” meaning stock your company issues that is not registered with the SEC for resale. After you hold the stock for certain length of time, you can resell it under SEC exemptions, although this is hard for private company stock. This is why the acquisition or IPO is needed to give them real value.

Readers of this article may find useful a free employee stock options calculator on myStockOptions.com at http://www.mystockoptions.com/mytools/ that calculates the after tax value of stock options and allows basic modeling (registration required).

Bruce Brumberg, Editor
http://www.myStockOptions.com

By: Scott Johnston

Scott Johnston — Tue, 23 Jan 2007 16:31:02 +0000

Thanks Bruce. I cover the early exercise option in the overview section. I wasn’t aware of the term “reverse vesting” — thanks for the info. I added this to the terms section. I agree the tax implications of options are annoyingly complex.

By: Bruce Brumberg

Bruce Brumberg — Tue, 23 Jan 2007 13:41:14 +0000

Good article for certain type of stock options in pre-IPO companies. Private companies with fast growth potential are also granting “early exercise” or “reverse vesting” stock options.

You can exercise them immediately and get a form of restricted stock. The stock you receive from the option exercise is subject to a vesting-like schedule that applies if you leave the company before the restricted stock vests.

The advantage to these type of options is that you exercise when there is no or little spread for tax purposes and you start the capital gains holding period clock earlier. The disadvantage is that the company may not go public or get acquired, thus the shares have no liquidity. Plus, if the exercise triggers taxes, you cannot sell the shares for it. Google, for example, has these type of options and it paid off for those employees that exercised early.

The tax issues are more complex, particularly for incentive stock options (ISOs).

Bruce Brumberg, Editor,
http://www.myStockOptions.com

By: Adam Platti’s Blog » Blog Archive » Great Article on Stock Options

Tue, 23 Jan 2007 03:57:02 +0000

[...] Under the Water – Scott Johnston » On startups – option packages, vesting, triggers, acceleration, and taxes [...]

By: Adam Rifkin

Adam Rifkin — Mon, 22 Jan 2007 02:37:16 +0000

Nicely written, Scott.

Although the only way to *really* understand it is to live through it…

By: Scott Johnston

Scott Johnston — Fri, 15 Dec 2006 05:09:49 +0000

@ Joyce – Good reminder — it is always the simple things.

@ Dave – you are right, I totally forgot to talk about the impact of preferred shares. I updated the post with a section for this. Thanks for the feedback.

By: Dave Hodson

Dave Hodson — Wed, 13 Dec 2006 22:05:58 +0000

One important item re: the value of your options – the average employee has no idea on the terms of venture funding. If the funding came with a participating preferred clause, the value of your options could be significantly *less* than you think.

For example if you have 10,000 shares, your company has 1m shares and is acquired for $1m, you might assume your take would be 10,000 * $1 (1m shares sold for $1m = $1/share) or $10,000. However, if the investors have a participating preferred clause, they get paid first and then common shareholders split what is left over.

See http://www.feld.com/blog/archives/2004/08/to_participate.html for more info

By: Troutgirl

Troutgirl — Wed, 13 Dec 2006 18:05:43 +0000

Awesome piece, Scott… so clearly written and informative! Regarding number versus percentage of options: my experience has been that most places will not volunteer the total number of shares unless the job applicant asks a direct question. As SOON as that offer letter hits the table in front of you, you should reflexively ask the hiring manager “How many total shares?”. I’m always amazed how few people do this!!!