I experienced dilution as a former employee of a startup. Teespring did a 13:1 down round a year or so after I left (2015?). If you weren't an accredited investor that could afford to invest in the round, you had 1/13 of your original shares after the round finished. I experienced both being pushed into AMT when exercising the options (they didn't offer early exercise) along with having 1/13 of my shares later on. No idea if I'll ever see any money out of the deal so I've chalked it up being a lesson learned -- many say to value stock options as $0 but they can have negative value.
well to be fair, you should never exercise if it isn't early exercise. the odds are very much against you. I mean, by the odds you shouldn't early exercise either but at least you don't get hit by the AMT bullet.
That's certainly not true. You should evaluate the investment just like any other investment and decide if you can afford to lose the money and stomach the risk.
Part of your evaluation should be consulting a tax professional to determine if there are any immediate, negative tax consequences. You're not guaranteed to get hit by AMT just because you exercise some stock options.
There are very few times where the finances work out for options. Most employees lack access to the necessary company financials to make an informed financial decision, there is a 100% downside risk and barring early stage founder equity stakes - it's unlikely that the equity will do better than getting lucky on a top stock pick.
I have yet to hear a single case of an employee purchasing their options when they left and thinking it was the right decision later on.
that's the problem with anecdotal evidence - you can't really tell for sure a company is going to become a massive unicorn often until very close to the point it does. I've worked at companies that raised many millions of $s and seemed very promising and a few years later went out of business. Who becomes a winner is also not always completely "fair" (as in it depends somewhat on circumstances/fortunate happenstance).
I think it's the other way around - we comparatively hear a lot more about the successes than the failures. For every unicorn that made 400 people millionaires there are probably >1000 startups that either went out of business, never had a liquidation event, or never at the scale that rank and file employers got anything significant.
Obviously not literally "nobody", someone at some point joins google/microsoft/facebook/amazon/etc at an early stage and exists a millionaire many times over. Just like every week somebody wins the lottery. It's just not as likely to happen to you personally as the people selling you on joining their early startup would like you to believe.
aye - latecomers to a company may have massive financial/product impact but have less equity when the IPO happens vs. those who were there initially and left after 12 months. On the other side the board and others can dilute early equity holders at their leisure.
At the end of the day you're really throwing money into a black box which may turn out to contain a trash can. There is more financial transparency in penny stocks.
I've personally had great success with RSUs, but those are ultimately part of your comp even if you discount them to zero - there is no requirement to put in additional money.
I won't claim that it's the expected outcome for most, but I've exercised options well into AMT territory on multiple occasions, and it seems to have worked out favorably to the point that I could probably skip the ping pong and shrimping boat phases and jump straight to mowing lawns for fun like Forrest Gump.
Also, I have heard stories of former employees that didn't exercise their options or cashed out early, and I wouldn't say regretted it, but reflected on the fact that the stock did a lot better than they predicted it would.
Salt of the Earth folk love to share their stories of financial misery, but generally keep quiet about their embarrassment of riches.
I purchased options. Some didn't pan out. Some did. Was an early employee on all of them, purchase price was relatively low, and I don't regret any of them.
If you aren't getting hit by AMT, the company is not growing fast enough and you should not exercise. If you are getting hit by AMT, the chances are you are out the exercise cost plus the AMT.
I've done exactly what you're saying I should not do and it worked out very well.
My point is that these hard and fast rules don't leave any room for nuance. Consider, as I mentioned in another comment, you don't have to exercise 100% of your options. Exercise whatever makes you comfortable. Maybe that's one under the number that would push you into AMT.
If zero is your comfort level, then so be it. But get to that conclusion by doing a little thought and evaluation, not applying an arbitrary rule.
Preface: humans are really bad at assessing risk. Also, you can't help but be biased in the decision process. Most people want a chance at the golden ticket. Especially after all that hard work we put in! We deserve a payout! What was I going to do with the $10,000 anyway, really? It won't break me.
The people that can make a reasoned and well considered, as impartial as possible judgement about it don't need to be told to do so. In fact, a statement that one should never buy the options can and mostly will (rightly so) just be ignored by such people.
But, judging by the number of people that have NO CLUE about how it works, need only the tiniest thing to grab onto to make the wrong decision. There is zero need to recommend "well consider your risk". If you have to ask, then my advice is always as I gave it: not to skip it as a rule, but if you re-read you'll notice all I said was, the odds are not in your favor and you "should" just leave the options behind. I think there is a subtle but important difference. Maybe I'm splitting hairs, if so, sorry.
You're actually arguing survivor bias as being some kind of counter argument! You are in the pretty small minority, I do hope you understand that.
Tell me, how do you feel about COVID vaccine? Shouldn't we just be allowed to make up our own mind about it? If masks and vaccines work, well the scientific set can wear masks and vaccine up. The anti-vax crowd can do as they please and die. We don't need the government to TELL US what to do, do we? No one gets out alive anyway, amirite?
What is your recommendation on COVID? Evaluate the risk and decide for yourself? Surely you prefer Florida's or Texas' take on COVID to California's then?
I now come full circle: humans are really bad at assessing risk.
> You should evaluate the investment just like any other investment
Except it's not like any other investment. It's an investment that you are too close to. You can't think 100% objectively about an investment that you're too close to. For many people the solution is unambiguous: If I can't be objective about a decision then the answer is automatically 'no'.
There are lots of things I'm close to that I need to think objectively about. Maybe I don't hit your ideal of 100%, but I do my best. Investments is one area. The health and well being of my children is another. You can never have perfect objectivity. You do the best you can. GP's advice is too rigid and therefor not very good.
FWIW, I'm speaking from experience. Had I taken GP's advice and "never exercise unless it's early exercise" then I would have missed out on a lot of money.
The other thing to keep in mind is you don't have to exercise 100% of your vested options. If you're too nervous or don't trust your own judgement, maybe go for 10%, or whatever makes you comfortable. There's a lot of room between 0 and 100 here. Go ahead and explore it.
