Re:Startup Stock Options – Why a Good Deal Has Gone Bad
by acjohnson55 on Wednesday April 10, 2019 @05:10PM
(#19628802)
That only works if you're a really early employee. Most moderately successful companies reach the point where their equity grants are worth enough that the exercise cost plus tax bill for an early exercise will be in the thousands.
You get a 409A valuation to establish the Fair Market Value of your stock. That valuation isn't based on the same criteria that investors use, it is much more rigorous and based on income, cash in the bank, etc. You could very well have a company raise money at at $10MM cap and be "worth" less than $1MM. If you grant someone stock at that price, their taxable income will be negligible - usually only a few hundred to a few thousand dollars, and then they don't have a giant tax bill at the end.
You still have to pay capital gains, but that only applies when you sell the stock, so you have the money to pay it.