A $20MM raise suggests a $100M valuation or so. That's a 20x increase in the stock price. OP's outlay would be something like $4000 + $35000 (state tax + short term capital gains. Less depending on how he hits AMT.). I don't think that's trivial, even if I'm off by a factor of 2.

It's the 409A valuation, not the funding amount, that matters. 409A value is usually much much less than the funding round.

That'll apply to the strike price as well as the current "valutation", so the multiple factor between the two valuations should be around the same regardless (a strike price of a non trivial number like $0.27 suggests that a 409a valuation was already in place to price the options)

The original 4.8M valuation (which is his strike price - extrapolating from his share price and ownership %) has now increased to ~40M (extrapolated from 20M raise, estimating ~100M preferred shares valuation and 40% of that for 409A valuation[1]). This means 4k outlay for initial stock, but they are now valued at ~33.2k, incurring some short term capital gains of ~5.6k. This still seems like a steal, as is the value dropped on that valuation of 33k I think it can be recognized as a loss to offset other earnings, so generally I don't think the tax is that bad a deal (if the person has the cash on hand).

[1] 41% is average ratio from here: https://www.capshare.com/blog/409a-valuation-guide/

I don't know what the OP's marginal tax rate was, but if he were a California resident, his taxes would be more around 15k.

Thx for the analysis.

Fwiw capital loss can only be applied to offset capital gains, other than 3k/year.

Capital losses also carry forward for your entire life. Either 3k a year of offset ordinary income until you die, offset any future capital gains, or have written off your entire loss.

I actually have no idea what you're talking about.

0.27 strike price was the 409A valuation at the time that the options were issued. There is usually another 409A valuation after the funding round. But we don't know what that value is. You can speculate, but using the funding round as the amount is wrong.

There's typically a lower bound of 1/10 the paper valuation, otherwise you risk the IRS coming after you at some future date. That relative lower bound ratio should be consistent across rounds, hence I'm approximating with a paper valuation ratio with a fudge factor of 2.

The company doesn't control the 409A valuation. That's done by an independent company who determines the 409A. So it's not something that is in the control of the company.

Sure, just like a house appraiser is an independent entity who determines the value of the house... Except that they always take the contract price in mind and basically attempt to not rock the boat. If they can make a case for a valuation close to the contract price, that's what they'll use. If they go too high or low, they risk killing the deal -- and their continuing business with the involved parties. Same problem as with legal arbiters and binding arbitration contracts.

You can't control them, but you can definitely "provide guidance" to the independent company as to what your desires are. They obviously won't give you something egregious but it's you who's paying them and will continue to pay them every year (a 409a valuation needs to be within 1 year to be valid for options). If a firm doesn't do something you like, you'll move onto the next one.

I think you're on the mark here. the capital gains tax liability from buying those shares would be significant, and possibly unaffordable since the shares are not liquid at the moment.

OP mentions that he received NSOs, not ISOs, so he would not be subject to AMT. He also wouldn't be taxed at capital gains rates on exercise but rather the spread would be taxed as regular compensation income. More info is available here: https://www.nceo.org/articles/stock-options-alternative-mini...

Don't some banks let you take out a loan for the amount of the capital gains taxes using the shares as collateral? I'm not sure but I could've sworn I heard about this.

If you never get a chance to sell that stock at a high enough price to cover that 35K loan, are you still personally liable for it?

Generally if a loan is collateralized, you are not liable for it beyond the collateral.

It's called margin, and you can only margin (use as collateral) shares that are liquid - i.e. publicly traded.

I know what margin is, and it's definitely possible to collateralize a loan with private shares. If you had options for 0.1% of Facebook before the IPO I guarantee somebody would write you a loan.

The question I was asking was: does any lender do this as a matter of policy as opposed to one-offs? The answer appears to be yes - Silicon Valley Bank appears to have let customers collateralize loans with private shares.

Yes, but before they're liquid they're close to worthless. A bank can't pay their bill with collateral that they can't liquidate after they repossess it. If the company is already scheduled to IPO, that huge risk mostly disappears, so of course someone would write that loan.

As for Silicon Valley Bank... They're serving the needs of the individuals around them. It's definitely not a common thing, and you're probably not getting anything close to a car or mortgage interest rate. (But still probably better than an unsecured loan.)

From their own copy: [0]

> Our tailored lending solutions can help you unlock the value of your private assets and simplify your financial life—in a way many traditional banks can't or won't.

[0] https://www.svb.com/private-equity-venture-capital/private-b...

For public companies, I know it's true. I'm not sure about private companies.

It's basically impossible with a private company.

Agree. It is dirt cheap. I would have exercised the options anyway given the bad feelings. Bad feelings are the sunk cost. Don't let that affect your future investments.

Yep. Let some other sucker do the hard work and be spiteful by blowing any money gained on something frivolous.

But we don't know their private valuation as of right now. So OP isn't just out $4k+, he's also going to pay taxes on the private valuation of his shares.