{"items": [{"author": "Nick", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848636224082", "anchor": "fb-848636224082", "service": "fb", "text": "Also remember that vested-but-unexercised options will evaporate within some time of leaving, so if you might want to leave but keep your equity exercising early means you won't risk paying taxes on doing so.", "timestamp": "1487276141"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848636224082&reply_comment_id=848645894702", "anchor": "fb-848636224082_848645894702", "service": "fb", "text": "→ In this case I would have ten years to exercise.

(Though at a previous company I think I had 10 months.)", "timestamp": "1487278796"}, {"author": "Koren", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848636224082&reply_comment_id=848751757552", "anchor": "fb-848636224082_848751757552", "service": "fb", "text": "→ Are these ISOs or NSOs? My understanding is that with ISOs (incentive stock options, which can only be given to employees), you pay taxes on the growth when you sell them, but with NSOs (nonstatutory stock options), you pay taxes on the difference between the strike price and the current FMV when you buy them. I think (but would not be surprised if I've learned this wrong) it's a federal tax thing that if it's an ISO, it needs to be exercised within 90 days of leaving the company, or it gets automatically converted to and treated as an NSO for tax purposes. That's outside of anything that might be in your option agreement about an earlier exercise expiration date if you leave (that's written into the agreements at my startup, but may not be in yours).

So there might, *if* these are ISOs and *if* I'm understanding this correctly, be a third option: do nothing for now, and decide whether or not to exercise your vested stock at the strike price if/when you leave the company (and owe no taxes on it at that time, I think), at which point you may have a better idea of whether you expect the stock to go up from there.", "timestamp": "1487305298"}, {"author": "Koren", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848636224082&reply_comment_id=848756762522", "anchor": "fb-848636224082_848756762522", "service": "fb", "text": "→ Er. With NSOs, you pay taxes on the difference between the strike price and the current FMV when you *buy* them. Will edit above, but also wanted to call out the correction here.", "timestamp": "1487306433"}, {"author": "Nick", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848636224082&reply_comment_id=849094425842", "anchor": "fb-848636224082_849094425842", "service": "fb", "text": "→ With ISOs you pay taxes (alternative minimum tax) on the growth when you buy them. Source: I owe the IRS a bunch of money because of this (I did know about this, but the fair market value changed between when I checked it and when I exercised)", "timestamp": "1487393070"}, {"author": "Nick", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848636224082&reply_comment_id=849094630432", "anchor": "fb-848636224082_849094630432", "service": "fb", "text": "→ It looks like with NQSOs (not NSOs) the relevant difference is that the gain is taxed as ordinary income, not just income for purposes of the AMT.", "timestamp": "1487393226"}, {"author": "Don", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848647242002", "anchor": "fb-848647242002", "service": "fb", "text": "What I've learned is never do anything solely for tax benefit. It is a game with made up rules which can change on a whim.", "timestamp": "1487279306"}, {"author": "Nick", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848647242002&reply_comment_id=848704013232", "anchor": "fb-848647242002_848704013232", "service": "fb", "text": "→ My impression is that pretty much everyone who's either expert at or expert on (http://www.overcomingbias.com/2007/04/expert_at_versu.html) money disagrees", "timestamp": "1487294030"}, {"author": "Nick", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848647242002&reply_comment_id=848706418412", "anchor": "fb-848647242002_848706418412", "service": "fb", "text": "→ Like, the rules are made-up and can be changed on a (collective) whim, but they usually aren't, and you can tell this from history", "timestamp": "1487294703"}, {"author": "Don", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848647242002&reply_comment_id=848739107902", "anchor": "fb-848647242002_848739107902", "service": "fb", "text": "→ Yep, change or not on a whim. An example of what the common wisdom (\"everybody\") said during the Obama years was \"he's gonna raise taxes, so convert your IRA/401k to a Roth and pay the (lower) taxes now\". Taxes didn't go up, those that converted paid taxes immediately and took part of their investment $ out of play to pay them during an unprecedented rally. The first sentence of my comment above was/is my primary point.", "timestamp": "1487302129"}, {"author": "Neela", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848668858682", "anchor": "fb-848668858682", "service": "fb", "text": "This is so helpful. I have options at a stable Fortune 50 and should've thought of this (because the stock is always appreciating). Have been thinking about donating the stock but have to figure if that gets me to the match I get when I donate through payroll. Sigh.", "timestamp": "1487284595"}, {"author": "Bil", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848674572232", "anchor": "fb-848674572232", "service": "fb", "text": "Interesting tax system, eh?", "timestamp": "1487286338"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848703658942", "anchor": "fb-848703658942", "service": "fb", "text": "I believe you should early exercise.

1. You have enough savings and enough future earning potential that you can afford to lose all the money you put into stock options.
2. Even ignoring your calculations, on priors you should expect early exercising to have higher expected value because it's riskier.

My own strategy at my current company is to early exercise a big chunk of my options as soon as I can (which I did last year) and then exercise the rest of the options as soon as they vest. This is an intermediate strategy: I'm not early exercising everything because I might want to leave the company before I'm fully vested, but I'm still exercising relatively quickly to avoid a big tax burden.", "timestamp": "1487293810"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848703658942&reply_comment_id=848709167902", "anchor": "fb-848703658942_848709167902", "service": "fb", "text": "→ You know that if you leave the company before you're fully vested they'll pay you back for the unvested shares, right? Or at least, if they don't pay you back, you get to keep the shares.

The way vesting works with early exercise is that you exercise all the stock, which means you own it, and then you sign a repurchase agreement giving the company the right to repurchase a steadily decreasing fraction of the stock if you leave.

(Disclaimer: not 100% sure of this; I may be misremembering the paperwork I signed.)", "timestamp": "1487295261"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848703658942&reply_comment_id=848710789652", "anchor": "fb-848703658942_848710789652", "service": "fb", "text": "→ Michael: why would you expect the riskier option to have higher EV here? There's nothing pushing toward constant risk-sensitive rewards between the two options.", "timestamp": "1487295584"}, {"author": "Michael", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848703658942&reply_comment_id=848752071922", "anchor": "fb-848703658942_848752071922", "service": "fb", "text": "→ Ben: yes they pay you back but you still lose on the opportunity cost of the money and it reduces your short term cash availability. Doesn't matter nearly as much as losing the money entirely so it's a fairly small consideration.

Jeff Kaufman: I don't understand your second sentence but you'd expect riskier options to have higher EV because:

1. In general, riskier things have higher EV.
2. VCs get approximately the same deal that you do, and if a low-risk option has high EV, VCs will push the price up until it no longer has high EV.
3. Later-stage companies are closer to profitability and therefore less risky. The longer you stay at a startup, the less risky it becomes. At the same time, investments in late-stage startups don't pay off as well on average as early-stage investments. (Taking this even further, small-cap stocks have worse EV than late-stage startups, and large-cap stocks have worse EV than small-cap stocks.)", "timestamp": "1487305541"}, {"author": "Ben", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848703658942&reply_comment_id=848888119282", "anchor": "fb-848703658942_848888119282", "service": "fb", "text": "→ Jeff: \"Why would you expect the riskier option to have higher EV here?\"
\"you'd expect riskier options to have higher EV because: 1. In general, riskier things have higher EV.\"

I think Jeff was asking you to explain why you thought that in general, riskier things have higher EV, not to rephrase your specific claim as a general claim.

The general heuristic that \"riskier things have higher EV\" depends strongly on what your class of \"things\" is (for instance, if the class of \"things\" is \"all trades someone might ever offer you\" then it's clearly not true, because I and many other people are happy to offer you risky negative-EV trades until the cows come home). I think you're putting early option exercise in the wrong class, but I can't really tell because you're not being specific about your heuristic.

\"2. VCs get approximately the same deal that you do, and if a low-risk option has high EV, VCs will push the price up until it no longer has high EV.\" This doesn't seem true to me. For one thing, VCs are giving the company large chunks of money while employees are giving the company small chunks of labor; because VC deals are so big and the company values money now a lot more than money later, they probably care more about structuring the VC deal to get the largest amount of money the soonest, which means not offering the VCs the chance to get options.

For another, the valuation at which a VC buys stock and the 409a valuation at which Jeff exercises his options are almost completely unmoored from each other.

For another, VCs are better-diversified, have 2-3 orders of magnitude more wealth than Jeff, have a quite different incentive structure, are taxed differently, and often care about things like board seats that aren't relevant to employees.

I think there's a nearby argument to what you're saying, of like \"if early exercise were both lower-EV and riskier, employees would never do it,\" which I'd be more sympathetic to (though still think one should put relatively little weight on it since (a) employees are often irrational and (b) people's situations vary a lot). But the reasoning you actually gave looks more like an application of efficient market heuristics to a decision that isn't really taking place in an efficient market in any relevant sense.", "timestamp": "1487344103"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848745395302", "anchor": "fb-848745395302", "service": "fb", "text": "Reading more, I think a major thing this post is missing is that ISOs already let you be taxed at the capital gains rate if you hold the options long enough before exercising (2y) and then hold the vested stock long enough before selling (1y). Except for the AMT. So I should redo this based on how it interacts with the AMT.", "timestamp": "1487303556"}, {"author": "Paul", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848745395302&reply_comment_id=848750040992", "anchor": "fb-848745395302_848750040992", "service": "fb", "text": "→ Woah, did not know that. Guess I should read more about taxes... O.O", "timestamp": "1487304656"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848745395302&reply_comment_id=848751627812", "anchor": "fb-848745395302_848751627812", "service": "fb", "text": "→ https://www.adlercolvin.com/.../A%20C%20Web%20Resources...", "timestamp": "1487305241"}, {"author": "Jeff Kaufman", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848745395302&reply_comment_id=848907450542", "anchor": "fb-848745395302_848907450542", "service": "fb", "text": "→ Updated the post to say that it's wrong, though not to be right yet", "timestamp": "1487348625"}, {"author": "Nick", "source_link": "https://www.facebook.com/jefftk/posts/848628654252?comment_id=848745395302&reply_comment_id=849093921852", "anchor": "fb-848745395302_849093921852", "service": "fb", "text": "→ Note that according to that document \"hold the options 2y before exercising\" refers to two years from the grant date, not the vesting date \u2014 I was briefly very confused.", "timestamp": "1487392942"}]}