Incentive Stock Options. The US government makes you pay taxes on the full paper gain the moment you exercise even though a real exit at that price is still a long ways off or likely still low probability. It makes average employees either bound to an employer (and never get favorable capital gains), or they have to be wealthy enough to pay the full tax hit the year of exercise and not be destitute if it never pays off later.
> or they have to be wealthy enough to pay the full tax hit the year of exercise
Or they could take an 83(b) election when granted the options. Or they could exercise some fraction of their options. Or they could sell some of the shares in the multibillion-dollar secondary market when they exercise to pay for the taxes.
Your broader point stands. But there are more choices than “eat it.”
>Or they could sell some of the shares in the multibillion-dollar secondary market when they exercise to pay for the taxes.
Effectively you can't unless the startup allows for it. I have stock and when I tried to sell on the secondary market exchanges all said that there's a lot of interest but due to the company always exercising right of first refusal no one will bother.
All a bunch of bandaids to get around what is the fundamental injustice. And the secondary market isn’t exactly active for small people and there is no guarantee the board will approve a sale.
Most companies don’t require Board approval for transfers. (There are better ways to moderate the process.) Companies that do are the ones choosing to restrict their employees, not the tax code.
Its not often mentioned in these threads that you can get what you paid in AMT back in the form of tax credits in subsequent years. Thats worth keeping in mind if you are doing a risk calculation about the probability that the valuation of the company might drop before your shares become liquid.
Words words words - if all of this can be mitigated then why have it in the first place? You work at a startup that hits and need to shell out 6 or 7 figures to exercise… “Bu bu but you can get it back!!” Just change the rule then! What is the benefit? It only harms employees of new ventures
My comment was intended to help people who might be in that situation better understand how AMT works, not to justify it.
But since you ask, the stated purpose of AMT is to make sure high earning individuals are not using tax loopholes to avoid paying any taxes. I assume it applies to ISOs to prevent employees from being compensated only in ISOs to get the better tax treatment.
Having paid AMT myself on exercising ISOs, I concede its an annoying additional thing you have to consider when taking an offer from a startup. But its not some grave injustice. Tech employees at successful startups with in the money options will be just fine.
