Summer 2021 Newsletter - Stock Option Exercise Strategies
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
Hello Startup Community,
It's Summer 2021. There's a million things to do and think about right now. And, yet, I invite you to pause, take a moment, and ask yourself: "What is my strategy for exercising my startup stock options?"
Why a Strategy? I wrote this menu of stock option exercise strategies to help startup employees get familiar with the complexities of stock options and choose a strategy for exercising. Taking the time and attention this requires will help avoid the unhappy surprises associated with startup stock options such as these examples:
Forfeiture at Termination. Sales executive drove sales and company value for four years and was terminated a few months before a $1B company exit. He could not afford the $1M exercise cost (to cover the exercise price and tax cost of exercise) within the 30-day post-termination exercise deadline, so he was forced to forfeit most of his vested options. He made approximately $500K at the exit; his former colleagues with similar option grants each made $10M.
Golden Handcuffs. Early hire at a future unicorn did not early exercise his options or exercise his options as they vested. He wanted to leave the company after four years when he was fully vested, but he could not afford the $2M cost to cover the exercise price and tax cost of exercise. Therefore, he had to stay at the company for several more years while he waited for an acquisition, frustrated that he was not able to move onto his next opportunity.
Tax Expense. Early startup hire waited to exercise his options (with a total exercise price of only $5K) until after the company's IPO. He had to sell the shares on the same day he exercised in order to cover the tax cost of exercise. Since he had not held the shares for a year before sale, his gains were taxed at ordinary income tax rates of over 40%. If he had early exercised the options for $5K at hire, he would have qualified for QSBS tax treatment on his gains, resulting in 0% federal tax rates on his gains and saving him >$1M in taxes.
Happy strategizing!
Stock Option Counsel, P.C. - Legal Services for Individuals. Thank you for your enthusiasm for my practice and blog. You can learn more - including testimonials - on the website.
“As a female leader in Silicon Valley, I’ve found that negotiating on my own behalf is hard. In some cases, I have felt uncomfortable asking for what I want, even when I know it’s rational and justified. Mary took time to understand my goals, provided me with expertise to give me confidence in my asks and supported me with feedback along the way. Mary was a terrific partner! She understood that the process was, for me, about getting to a win-win with my future employer and making sure we all got what we wanted in the end. A terrific example of women helping women to negotiate in a style that works for us. Thank you, Mary! ”
Megan Hanley, CMO, Equity Offer Counsel
Please keep in touch!
Contact. You are welcome to contact Stock Option Counsel, P.C. - Legal Services for Individuals for guidance on your startup equity, including:
Founder interests at incorporation, financings and exits
Job offers, equity grants and employment agreements
Executive compensation design
Acquisition terms and post-acquisition employment agreements
Or check out our blog and social media for great posts on startup equity for founders, executives and employees.
Attorney Mary Russell counsels individuals on startup equity, including:
You are welcome to contact her at (650) 326-3412 or at info@stockoptioncounsel.com.
