Unlocking Your Golden (Stock Options) Handcuffs

As you can see from the job postings here at StartupHire, there are a lot of opportunities out there at companies other than your current company. Even if your company has high potential, perhaps you don’t have an ideal situation with your current boss, or you’ve hit the ceiling on your equity compensation potential, or you simply need to relocate for personal reasons. Whatever the reason, if you are considering changing jobs, you may find yourself wondering what to do about your stock options that have vested and represent your years of hard work at your current company. If you leave, you typically have 30 to 90 days during which to exercise these stock options. If you don’t exercise they expire worthless. If you do exercise, you are faced with the high out of pocket cost of exercising, the possibility of paying AMT, and the possibility of concentrating a substantial portion of your savings in the stock of a company that you are leaving. So what do you do? In fact, stock options are designed to make you think twice before you move, like golden handcuffs. But those handcuffs are often not so golden when you consider the high failure rate of startups, the typically long length of time before final liquidity, and the fact that final liquidity valuations are often not high enough for common stockholders to receive a significant payout after the investors and executive founders are paid first. How do you level the playing field? The Employee Stock Option Fund (ESO Fund) is a resource that can help you get the cash to exercise your options, while retaining the equity upside potential for which you joined in the first place. The ESO Fund can absorb most of the risk on your behalf by loaning you the cash needed to exercise your stock options, so that you can preserve your future earnings in your current company while you also begin vesting equity in a new company.

How does the ESO Fund work?

The ESO Fund provides you with a loan that has no interest or principal payments until your stock realizes a liquidity event. Our loan terms are designed to be borrower-friendly, incorporating market-leading principal and interest payback terms. If that liquidity event is insufficient to pay off your loan, the ESO Fund bears the loss for you. In exchange for the risk, the ESO Fund will share in your future profits, if any. The ESO Fund’s percentage in the sharing arrangement will vary on a case-by-case basis, depending on the assessment of risk associated with your company.

How does Alternative Minimum Tax (AMT) apply to stock options?

Most regular employees at private companies have qualified incentive stock options that can be exercised on a tax-free basis even when the fair market value of the stock is higher than the exercise price. However, the IRS designed the AMT program to prevent the use of stock options as a tax loophole for the wealthy. Unfortunately, the thresholds for defining “wealthy” have not been significantly updated and that means you could be subject to AMT if you either have a high base salary or if your options represent a substantial value. Non-qualified incentive stock options are subject to tax at exercise if the fair market value of the stock is higher than the exercise price. NQ ISOs are typically associated with non-employees such as contractors and outside business partners.

Long term capital gains vs. Ordinary income tax rates:

One immediate side benefit of exercising your stock is starting the one year clock to qualify for long term capital gains treatment on your future gains. The amount of tax savings could be nearly 50% depending on your personal tax bracket and your state of residence. The IRS rewards you with a lower tax bracket when you take an investment risk, but the ESO Fund is taking most of the risk for you so this is truly a free benefit.

How can I benefit if I already own stock from a prior exercise?

Selling your private company stock is rarely possible but often desired. Your stock options represent a one shot opportunity to make as much money as possible. With a few exceptions such as Facebook, where private sale valuations were often higher than the post-IPO price, you will likely leave most of your future earnings on the table if you sell out now. If you need liquidity now, rather than selling your stock and foregoing any possibility of a significant gain, consider taking out a loan against your stock with the ESO Fund. Since you only have to pay this loan off at the time of final liquidity, this is essentially money in your pocket just as if you had sold your shares/options.

Advertising Disclaimer: This article is a paid advertisement prepared by the ESO Fund and does not constitute legal or tax advice.

Leave a Reply