Form 83b is what startup shareholders use to not have to FMV their shares every time they buy or it vests. Many use it and what you described is not how it plays out.
I’d be really curious to read examples of how this has played out with real IPOs — whether they were highly successful and made vested employees into millionaires or not so successful.
What’s the risk to employees dishing out this kind of cash? If an IPO flops, do they lose their investment? I’d imagine it’s lower risk than buying shares on the open market because of the steep discount.
Great question. I've often thought the same thing. I think it really depends on when the employee joined. One of the reasons Instacart slashed their own valuation was to attract talent. They knew that everyone who had joined within the last two years was basically under water from an equity perspective - their strike was equal to or lower than the fair market value based on current conditions. So it's all on a case by case basis as to when the employee joined and what their options are pegged to. I'm sure the very early employees are still doing really well regardless of if the company valuation is 10B vs 50B. It's all relative.
The risk to employees is that they pay for options (cash out of pocket) for stock that ends up being worth less than what they paid. Sot they lose out on the time value of working there vs somewhere else and vesting equity AS well as investing money into the company.
There were a lot of horror stories in the dot com crash where employees bought their stock and it went to zero. A double whammy when you layer in the taxes they paid on those options that they paid for.
What if I don’t vest and keep options? Can’t I vest them later on as well - what do I have to lose? And I do have the option to vest later at same strike when things get more liquid, maybe when startup has grown and sites like equity zen etc can provide more liquidity.
Good question - so as long as you work at the company you are vesting. When you leave the company you stop vesting.
But just because you vested doesn’t mean you own the shares yet, you just have vested the right to purchase them.
So you can always vest and then to your point wait until there’s a liquidity event later to purchase. This provides the cash to cover the expenses incurred for exercising and associated taxes.
You can also tap into sites like equity bee and secfi who will lend you money based on your vested options.
But once again you don’t own your vested options until you purchase which is at your original strike price
Thanks. Yes so my point is that it makes sense to not exercise your options and thus you save in paying taxes. I assume these options don’t expire so there is no issue in this.
And once liquidity is easy (through equity zen or ipo whatever), one can exercise options and then atleast have the optionality to sell stocks one buys to get some actual cash to pay tax and make some money. Please let me know if I am missing anything or if there is any issue in this system. Because it seems to me that no one would ever exercise if they have to pay taxes for an illiquid equity transaction which can go to 0 as well.
I believe most companies require you to exercise your options within 90 days of leaving the company. This way you cant just hold the option once you leave risk free
Form 83b is what startup shareholders use to not have to FMV their shares every time they buy or it vests. Many use it and what you described is not how it plays out.
I’d be really curious to read examples of how this has played out with real IPOs — whether they were highly successful and made vested employees into millionaires or not so successful.
What’s the risk to employees dishing out this kind of cash? If an IPO flops, do they lose their investment? I’d imagine it’s lower risk than buying shares on the open market because of the steep discount.
Great question. I've often thought the same thing. I think it really depends on when the employee joined. One of the reasons Instacart slashed their own valuation was to attract talent. They knew that everyone who had joined within the last two years was basically under water from an equity perspective - their strike was equal to or lower than the fair market value based on current conditions. So it's all on a case by case basis as to when the employee joined and what their options are pegged to. I'm sure the very early employees are still doing really well regardless of if the company valuation is 10B vs 50B. It's all relative.
The risk to employees is that they pay for options (cash out of pocket) for stock that ends up being worth less than what they paid. Sot they lose out on the time value of working there vs somewhere else and vesting equity AS well as investing money into the company.
There were a lot of horror stories in the dot com crash where employees bought their stock and it went to zero. A double whammy when you layer in the taxes they paid on those options that they paid for.
thanks for the great questions
What if I don’t vest and keep options? Can’t I vest them later on as well - what do I have to lose? And I do have the option to vest later at same strike when things get more liquid, maybe when startup has grown and sites like equity zen etc can provide more liquidity.
Good question - so as long as you work at the company you are vesting. When you leave the company you stop vesting.
But just because you vested doesn’t mean you own the shares yet, you just have vested the right to purchase them.
So you can always vest and then to your point wait until there’s a liquidity event later to purchase. This provides the cash to cover the expenses incurred for exercising and associated taxes.
You can also tap into sites like equity bee and secfi who will lend you money based on your vested options.
But once again you don’t own your vested options until you purchase which is at your original strike price
Thanks. Yes so my point is that it makes sense to not exercise your options and thus you save in paying taxes. I assume these options don’t expire so there is no issue in this.
And once liquidity is easy (through equity zen or ipo whatever), one can exercise options and then atleast have the optionality to sell stocks one buys to get some actual cash to pay tax and make some money. Please let me know if I am missing anything or if there is any issue in this system. Because it seems to me that no one would ever exercise if they have to pay taxes for an illiquid equity transaction which can go to 0 as well.
I believe most companies require you to exercise your options within 90 days of leaving the company. This way you cant just hold the option once you leave risk free
Great explanation, CJ. Any resources you can point to that explain any write-off options in the years following the AMT charge?
thanks for reading! yes here's an article on how AMT credit works. the amount of AMT credit you can claim in a year is limited (unfortunately)
https://secfi.com/learn/amt-credit
and here's the form you use to claim it
https://www.irs.gov/pub/irs-pdf/f8801.pdf