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AMT is a different way of calculating your tax obligation. It counts more things as taxable income—including the spread between the price you paid to exercise ISOs and their fair market value when you exercised.
Share Incentives for Employees of Private UK Companies
If you make more than the AMT exemption amount , you need to calculate your tax obligation both ways and pay the greater of the two calculations. AMT can potentially reach thousands of dollars depending on your income and the difference between your strike price and the FMV of the stock when you exercise. Talk to a tax professional to learn how to plan for your AMT liability. In order to take advantage of the ISO tax benefit, you need to meet certain holding periods.
Specifically, you must hold keep ISOs for at least one year after exercising and two years after your options were granted. If either of these holdings periods is not met for example, if you participate in a tender offer and decide to exercise and sell in one transaction , the difference between your strike price and the sale price of shares will be taxed as ordinary income. This applies even if your company gives you more than 90 days to exercise after leaving.
As discussed in Part 1 , most companies require you to exercise your vested stock options within a set window of time after leaving the company. This window, called a post-termination exercise PTE period , is usually around 90 days.
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As you can see in the graph above, the benefit of doing this is that you are minimizing the pre-exercise gain. This could potentially limit your exposure to AMT. The downside here that you are taking on risk.
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There is no guarantee that your stock will ever be liquid, so you are paying to buy stock that could one day be worthless. If you choose to exercise options early, you must file an 83 b election to take advantage of the beneficial tax treatment. You only have 30 days to file this with the IRS, and there are no exceptions. The third common time to exercise your stock options is upon an exit, such as an IPO or acquisition.
This is the least risky time to exercise because you know the stock is liquid. You can turn around and sell the stock for a gain hopefully the same day you pay to buy it. The downside in this situation is that you usually end up paying more taxes. Remember: If you want to qualify for favorable tax treatment, you need to hold your ISOs for at least one year after exercising. If this happens, your options will be treated like NSOs, and any spread between your strike price and the stock price when you exercise is taxed as ordinary income.
Equity part 1 : Startup employee stock options. Equity part 2 : Stock option strike prices. Carta employee resource center. How to value your equity offer free startup equity calculator. Employee Shareholder Bill of Rights. What does exercising stock options mean? What happens to equity when a company is acquired? This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests.
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Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.
Why Equity Education is Essential.
DBA Carta, Inc. It helps assign the option pool that is created basically a placeholder of shares , and also outlines all of the rules related to that award e. From all the data on our platform [which has been used by around 40 startups since launch], the average option pool size is around 8. What are the terms? People sometimes focus on the percentage too much. They should focus on the value of that share now. Find out when the next fundraising is happening.
If you join a company super early, but there will be five or six more funding rounds, your share will dilute significantly. Do the maths. Between four to five years, sometimes a little bit shorter. It normally starts the day an employee joins, with a one to two year cliff: that means, if you left within the cliff period you would lose your options.
A small business guide to share options |
It will normally come after an employee joins. Some have had up to 20 employees. How do you get people to unlock that value? VC firm Index has published a whole handbook on the subject. Not to be outdone, fellow London VC Balderton has also written a guide to employee equity. This guide on option pools from Forward Partners is very helpful too. Vestd is a UK startup which helps companies manage employee equity.
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