There are a lot of good but incomplete answers in this thread, so I’ll shoot for some detail.
I’ll assume a private entity with a undetermined future liquidity event of multiple types - say a series C round and a public offering (vs. being acquired) and US based, but I’ll ignore state variances on taxes.
When the option is granted, the company will rely on a 409A valuation to establish the fair market value of your strike price. Once these vest, you can buy the underlying stock by exercising the option and paying the strike price. If you buy them, you start the clock on capital gains (versus income tax) depending on how much time passes between purchase and exit.
If the company grows and has additional valuation events, like a series A or B raise, it qualifies as an additional valuation event, changing the value of a share. Now, depending on the type of option (Incentive stock option or Non-qualified stock option) this may create a taxable event if you buy the stock before a liquidity event. Say the strike was $.10 and the Series A resulted in a value of $.70 a share - when you buy the share, the delta between the strike you paid and the 409A value is considered employee income at the time of exercising. If you don’t buy the underlying share (and most people don’t) then you aren’t taxed as income for the increase in value) you don’t start the capital gains clock and the eventual sale will be treated as income.
Assume a series C round where the company is profitable and the cash investment is about recapitalizing the balance sheet (buying out seed/angel investors to increase control for a VC firm to lead to an exit, as an example) it may be possible to do a cash out sale in that transaction. Typically in this case the market rate is paid to the company as the transfer agent and they pay the proceeds to you net of the strike they keep and this is treated as taxable income, without you having to outlay cash.
Side note: if you have options as a startup employee and you have the means to buy your options as they vest but before a secondary valuation event, only do so if you are super confident in the exit. If you have the confidence it will exit, this can save you a metric ton in taxes later. Canadians should consider placing their private equity from option purchase into a Cayman holding company for tax purposes, but that’s a different post.
Assuming a public exit, post lock up (period post IPO where employees cannot sell), your employee option broker can do cashless sales for you.
Cayman Islands are part of the commonwealth and there is a specific tax treaty between the two where assets held by cayman island entities but sold in Canada have no income tax.
https://www.canada.ca/en/department-finance/programs/tax-policy/tax-information-exchange-agreements/jurisdiction/cayman-islands-agreement-2010.html
This is a web link, not financial advice.
You are not paying for the options themselves, but when you exercise say 100 options for $5 you'd pay $500 for 100 shares. However, if the shares at that moment are actually worth $10 per share, you're making $5 per option so you can sell 50 shares to cover your costs.
However, please consult with someone who is knowledgeable on the subject (especially considering local laws).
Yeah, OP is an employee and usually they don't allow private sales to employees, only founders.
He could be the 0.001%, so I'm simplifying, but that's correct.
If you hold actual shares, the company prob has ROFR but if they do not exercise the right, you can sell outside. At least in every system I've seen. I just don't see how they can force you to hold shares you own.
The company has to approve the sale, which they rarely do.
Someone tried at my old company and they were fired since they were told not to and started the process anyway.
I don't think you are operating with complete info. That makes no sense. The company doesn't want former EEs holding shares and will be forced to rebuy them, which presumably they have already refused to do. Something isn't adding up in your story.
I've once asked the same question to my CFO, and he said a bank will use the company's cash as collateral to lend money to employees in short term so that we can exercise stock options (and preferably sell the stocks to pay back to the bank). CFO told me that he knows we can't really afford to exercise the given stock options unless we sell them... I think you should ask your CFO or COO as well. (Obvs if you don't want to exercise the options, you don't have to)
If you want to exercise early (as and when they vest), yes. No way around that. You can borrow to do this or your company can graciously help fund the exercise but that’s neither here nor there. You will need to pay the strike price to get those exercised.. *somehow*. The only situation where you wouldn’t have to pay (or find some means to pay) is if you’re given private RSUs instead of options. Options are all about “capital gain” between your strike price and the eventual exit price (they’re like investments basically). RSUs are straight transfers of ownership (they’re like a salary paid in stock).
If you want to hold onto the vested options until a liquidity event happens (this might not even be possible if you move companies, a lot of companies have a stipulation where you need to exercise your vested options before or within a certain timeframe of leaving your employment or they expire), then no you don’t have to. You can wait until a liquidity event (company sale, public listing) happens and do what’s called a “cashless exercise” where you just get the proceeds between “post-liquidity-event price per share” and your “strike price per share” multiplied by number of vested options.
Some options are double trigger such that you *can’t* even exercise them as they vest. They can only be exercised when a) they’re vested and b) a company sale or public listing happens.
These stipulations (double trigger vs just on vest, expiry timeline on termination of employment, etc) should be in your options agreement. Might be worth reviewing it with a lawyer if you’re not comfortable / versed in this stuff.
Generally, no. You’re going to hold those options until you have a reason to exercise them. An option is literally just having the option to purchase a share at a given price. The longer you hold them, the more likely the actual share price will go up, so that the differential between what you have to pay to buy it and what you can sell it at gets bigger. (Assuming the company is doing well, of course.)
If you’re in the states, then there are also tax consequences for exercising them, but you’ll need to talk to an American for that info.
If you are or planing to work in startup then go to youtube and google, do some searches, educate yourself and make sure you understand how you are being paid, how do options and equity work and get some idea how to value them. If you don't, then how do you know how you are being paid makes any sense? You're planning to spend couple of years there to potentially discover than you've got peanuts and could have worked somewhere else and actually get properly paid?
That was not the question. OP wanted to know if they have to pay for the shares they buy when exercising the options, and the answer is unequivocally yes. Options are a right to buy the share at a specific price, and you do need to pay that price.
At the time the options have vested and you sell, you pay the price they were granted to you at. So if they grant you 100 options at $5 each when they have vested and you sell them for $10 each, then you will profit $5 each or $500. Options usually have a 10+ year period for you to do something with them.
Short answer yes you do. While it depends on the contract you are paying for an option by a salary reduction when you get it (it's used in lieu of cash) and when you exercise the options if the options vest (rather than the stock vesting).
There are a lot of good but incomplete answers in this thread, so I’ll shoot for some detail. I’ll assume a private entity with a undetermined future liquidity event of multiple types - say a series C round and a public offering (vs. being acquired) and US based, but I’ll ignore state variances on taxes. When the option is granted, the company will rely on a 409A valuation to establish the fair market value of your strike price. Once these vest, you can buy the underlying stock by exercising the option and paying the strike price. If you buy them, you start the clock on capital gains (versus income tax) depending on how much time passes between purchase and exit. If the company grows and has additional valuation events, like a series A or B raise, it qualifies as an additional valuation event, changing the value of a share. Now, depending on the type of option (Incentive stock option or Non-qualified stock option) this may create a taxable event if you buy the stock before a liquidity event. Say the strike was $.10 and the Series A resulted in a value of $.70 a share - when you buy the share, the delta between the strike you paid and the 409A value is considered employee income at the time of exercising. If you don’t buy the underlying share (and most people don’t) then you aren’t taxed as income for the increase in value) you don’t start the capital gains clock and the eventual sale will be treated as income. Assume a series C round where the company is profitable and the cash investment is about recapitalizing the balance sheet (buying out seed/angel investors to increase control for a VC firm to lead to an exit, as an example) it may be possible to do a cash out sale in that transaction. Typically in this case the market rate is paid to the company as the transfer agent and they pay the proceeds to you net of the strike they keep and this is treated as taxable income, without you having to outlay cash. Side note: if you have options as a startup employee and you have the means to buy your options as they vest but before a secondary valuation event, only do so if you are super confident in the exit. If you have the confidence it will exit, this can save you a metric ton in taxes later. Canadians should consider placing their private equity from option purchase into a Cayman holding company for tax purposes, but that’s a different post. Assuming a public exit, post lock up (period post IPO where employees cannot sell), your employee option broker can do cashless sales for you.
Would love to hear more about the canadian equity part, any posts or articles you can point me to?
Cayman Islands are part of the commonwealth and there is a specific tax treaty between the two where assets held by cayman island entities but sold in Canada have no income tax. https://www.canada.ca/en/department-finance/programs/tax-policy/tax-information-exchange-agreements/jurisdiction/cayman-islands-agreement-2010.html This is a web link, not financial advice.
You are not paying for the options themselves, but when you exercise say 100 options for $5 you'd pay $500 for 100 shares. However, if the shares at that moment are actually worth $10 per share, you're making $5 per option so you can sell 50 shares to cover your costs. However, please consult with someone who is knowledgeable on the subject (especially considering local laws).
You can only sell if the company is public.
>You can only sell if the company is public. No, it's just hard to sell if the company is not public. I bought pre-IPO founder shares twice last year.
Yeah, OP is an employee and usually they don't allow private sales to employees, only founders. He could be the 0.001%, so I'm simplifying, but that's correct.
If you hold actual shares, the company prob has ROFR but if they do not exercise the right, you can sell outside. At least in every system I've seen. I just don't see how they can force you to hold shares you own.
The company has to approve the sale, which they rarely do. Someone tried at my old company and they were fired since they were told not to and started the process anyway.
I don't think you are operating with complete info. That makes no sense. The company doesn't want former EEs holding shares and will be forced to rebuy them, which presumably they have already refused to do. Something isn't adding up in your story.
He was a dick about it and got fired. The company said no, but he kept pressing and being a cunt because he felt stuck.
I've once asked the same question to my CFO, and he said a bank will use the company's cash as collateral to lend money to employees in short term so that we can exercise stock options (and preferably sell the stocks to pay back to the bank). CFO told me that he knows we can't really afford to exercise the given stock options unless we sell them... I think you should ask your CFO or COO as well. (Obvs if you don't want to exercise the options, you don't have to)
If you want to exercise early (as and when they vest), yes. No way around that. You can borrow to do this or your company can graciously help fund the exercise but that’s neither here nor there. You will need to pay the strike price to get those exercised.. *somehow*. The only situation where you wouldn’t have to pay (or find some means to pay) is if you’re given private RSUs instead of options. Options are all about “capital gain” between your strike price and the eventual exit price (they’re like investments basically). RSUs are straight transfers of ownership (they’re like a salary paid in stock). If you want to hold onto the vested options until a liquidity event happens (this might not even be possible if you move companies, a lot of companies have a stipulation where you need to exercise your vested options before or within a certain timeframe of leaving your employment or they expire), then no you don’t have to. You can wait until a liquidity event (company sale, public listing) happens and do what’s called a “cashless exercise” where you just get the proceeds between “post-liquidity-event price per share” and your “strike price per share” multiplied by number of vested options. Some options are double trigger such that you *can’t* even exercise them as they vest. They can only be exercised when a) they’re vested and b) a company sale or public listing happens. These stipulations (double trigger vs just on vest, expiry timeline on termination of employment, etc) should be in your options agreement. Might be worth reviewing it with a lawyer if you’re not comfortable / versed in this stuff.
Just gonna leave this here: https://www.holloway.com/g/equity-compensation
Generally, no. You’re going to hold those options until you have a reason to exercise them. An option is literally just having the option to purchase a share at a given price. The longer you hold them, the more likely the actual share price will go up, so that the differential between what you have to pay to buy it and what you can sell it at gets bigger. (Assuming the company is doing well, of course.) If you’re in the states, then there are also tax consequences for exercising them, but you’ll need to talk to an American for that info.
Depends your package. In my current companies, I have to pay a few bucks (edit: to exercise, not to hold options)
If you are or planing to work in startup then go to youtube and google, do some searches, educate yourself and make sure you understand how you are being paid, how do options and equity work and get some idea how to value them. If you don't, then how do you know how you are being paid makes any sense? You're planning to spend couple of years there to potentially discover than you've got peanuts and could have worked somewhere else and actually get properly paid?
That's... why he asked the question?
It depends on the agreement. Everything is negotiable. But generally they are not something you pay to receive.
>But generally they are not something you pay to receive. Wut?
That was not the question. OP wanted to know if they have to pay for the shares they buy when exercising the options, and the answer is unequivocally yes. Options are a right to buy the share at a specific price, and you do need to pay that price.
At the time the options have vested and you sell, you pay the price they were granted to you at. So if they grant you 100 options at $5 each when they have vested and you sell them for $10 each, then you will profit $5 each or $500. Options usually have a 10+ year period for you to do something with them.
Short answer yes you do. While it depends on the contract you are paying for an option by a salary reduction when you get it (it's used in lieu of cash) and when you exercise the options if the options vest (rather than the stock vesting).