Pinterest lets employees exercise options 7 years after leaving

http://fortune.com/2015/03/23/pinterest-employee-taxes/

by ropiku • 11 years ago

422 132 11 years ago

dlu• 11 years ago

Hey look, it's something Sam Altman suggested, but happening in real life

habosa• 11 years ago

This is really great, I hope more startups follow. In today's funding environment startups that are angling for an IPO can stay private for a very long time. Many companies are raising billions of dollars over 5-10 rounds before looking to the public markets. That can mean a long time before employees may choose to exercise their options.

Pinterest seems to recognize that if you put in two years at an early stage of the company you deserve to share in future financial success.

I wonder why they made this move now? Specifically, I wonder if it came from the executives, investors, or both?

sandofsky• 11 years ago

I'm curious about how this works. I thought, legally, ISOs must expire within 3 months of leaving the company. Assuming they've been issuing ISOs up to now, are they converting them to something else, like NQSOs or RSUs?

ssorallen6• 11 years ago

They automatically convert from ISOs to NSOs according to Sam Altman's post[1]:

There are some tricky issues around this—for example, the options will automatically convert from ISOs to NSOs 3 months after employment terminates (if applicable) but it’s still far better than just losing the assets.

[1] http://blog.samaltman.com/employee-equity

caseyf73• 11 years ago

ISOs are rare these days. If you have stock options, they are probably NQSOs. ISOs had too many restrictions so most companies stopped using them.

ssorallen6• 11 years ago

What restrictions do you mean? ISOs are better for the employee because any gain on exercise is not taxed as regular income. If the value is high enough the employee might be subject to alternative minimum tax (AMT), but the possibility of paying no tax is a benefit over NSOs whose gain is taxed as regular income and is subject to tax withholding.

bobsky• 11 years ago

Bravo. More companies that support this trend the better for the rest of us* (the non founders cohort that is).

This movement only makes me appreciate the management and culture of Pinterest; quite the opposite of the Zynga fiasco [1][2]

[1] http://www.cnet.com/news/zynga-to-employees-give-back-our-st... [2] http://www.cnet.com/news/zynga-uses-stock-options-to-keep-em...

brandonmenc• 11 years ago

Zynga clawed back shares from underperforming founding executives, not rank-and-file employees, right?

Not that you were, but that episode always seems to be painted as though Pincus were yanking options away from sub-$100k/yr employees in the trenches.

disclaimer: I'm not defending Zynga in general, nor am I trying to take the shine off of Pinterest's policy.

ekanes• 11 years ago

Sure, but if an executive is under-performing, you fire them. You don't go back and change their deal.

skunkworks2• 11 years ago

Correct. Their lesson was that you shouldn't claw back equity from underperforming executives, you should just let them go.

fsk6• 11 years ago

I think they clawed back unvested options from many employees, who had unvested options with substantial value. That breaks the implied social contract of a startup. If the company is wildly successful, they'll try to claw back your unvested options, which makes startup equity even less attractive than it would otherwise be.

Zygna isn't the only one that did this. Didn't Facebook also do this?

(So in a startup, you can be screwed with options in three ways. If the startup fails, your equity is worth zero. If there's a low-value buyout, the common shareholders can get nothing. If the startup is wildly successful, the company will claw back your unvested options. Why join a startup for equity if you're going to get cheated when you hit the 100x home run?)

Zygna got what they deserved. With changes to the way Facebook promotes their feeds and the switch to mobile, they lost most of their market.

http://blog.sfgate.com/techchron/2013/06/04/why-zynga-is-fai...

jacquesm• 11 years ago

Define 'underperforming'. That's about as subjective as it gets.

walshemj7• 11 years ago

"An injury to one is an injury to all" and if you can do this to board members who will have the wealth to fight this - what would they do to the rank and file.

prostoalex3• 11 years ago

In Zynga case there's no material difference between

* asking an employee to give up a certain number of options

* firing the employee, making further option vesting impossible

By not firing immediately and by not requesting 100% of options be cancelled out, Zynga was actually playing nice. If you were among people affected by that offer, the writing as far as future career prospects at Zynga was on the wall.

fsk6• 11 years ago

Firing people to weasel out of paying their unvested options is definitely shady. When those employees were hired, did they tell them "Oh, by the way, if your unvested options wind up being worth a lot more than your fair salary, we're going to threaten to fire you to avoid paying."?

If someone had $1M in unvested options, and you ask them to renegotiate for $200k and keep them there as an employee, that's really tone deaf. Do you really think that employee is going to give their best efforts after you just cheated them out of $800k?

darkarmani3• 11 years ago

By not firing immediately and by not requesting 100% of options be cancelled out, Zynga was actually playing nice.

That's not why Zynga did it. They weren't playing nice, they wanted people to stay on with a reduced compensation.

chrisbennet• 11 years ago

By their actions, Zygna also signaled to the other employees that Zynga was going play a "heads we win, tail you lose" in the future. Who in their right mind would ever work for that founder again?

Going in, a startup employee gets some stock (upside) in exchange for risk (downside). Zygna used their relative power to reneged on that agreement to capture the employee's upside. "You can give us your money or we can take it AND fire you. Hey, but its your choice."

They were in no way being nice.

dustingetz2• 11 years ago

It's better for founders too if the employees don't get screwed because a portion of the talent is silently passing over equity opportunities for fear of the complexity, and a founder can't even see or measure the talent that silently passes

woah• 11 years ago

Like me! Why can't there be a simpler subset of corporate law? A startup using corporate law that was easy to reason about (like a programming language) would have a huge recruiting advantage.

ubershmekel• 11 years ago

Your comment sounds interesting though I'm not sure I'm following. What can't a founder see or measure? Why would the founder care? For rehire potential?

mblevin• 11 years ago

This is a great move and incredibly employee-friendly. We'll see if this is the beginning of other companies following suit, but I doubt it.

As has been discussed before it's not the mechanics that matter here, but rather the psychology of founders.

More often than not, there is the belief that even if you've been an employee for 2+ years, if you're not "in it for the long haul" then you don't deserve to hold on to your equity without paying for it in cash (or taking the tax hit).

Not to mention there's very little incentive to amend these policies outside of generating general goodwill.

amirnathoo• 11 years ago

Not to mention there's very little incentive to amend these policies outside of generating general goodwill.

There is now an incentive for other companies to follow suit since savvy employees will value offers from Pinterest and other companies with this policy much more highly.

It's rare that a company like Pinterest breaks ranks on things like this. I hope they get a lot of goodwill from employees and applicants as a result.

jpmattia2• 11 years ago

Looks like the Fortune article missed a big point: The exercise of the options often requires a big pile of money to be paid by the leaving employee to the company (ie, the strike price of the option. This occurs regardless of tax issues.)

The advantage is seeing how well the stock performs, then performing the exercise. If the company has gone public, then no real money needs to be put up by the employee; Exercise and sale can occur in one fell swoop.

ssorallen6• 11 years ago

Exercise and sale can occur in one fell swoop.

You lose the reduced taxes of long term capital gains if you wait, for whatever reason, to exercise and sell the same day. You have to hold the shares for 1 year + 1 day from the day you exercise for the subsequent sale to be taxed as long term capital gains. For even the top tax bracket, the difference is 20% in taxes.

jpmattia2• 11 years ago

That's correct, but remember that stocks go both up and down. Back in the bubble, a lot of people got very burned: They tried to save the diff between short- and long-term cap gains and ended up losing far more because of variations in price.

To add insult to injury, many got nailed by AMT at the point of exercise. By the time they figured this out, the entire grant would not cover the bill to the Feds.

joelgrus• 11 years ago

Yeah, I left a startup last year and exercised my options on the way out. The check I had to write for the strike prices was a lot bigger than the AMT hit. (Which is not to say that that's always the case, but it definitely was for me.)

bagels• 11 years ago

What argument is there for this policy against the employer, besides it's a nice thing to do?

The employer benefits from having the options expire because people will be less encouraged to leave with the current standard of expiring options.

kenrikm• 11 years ago

The employer does not benefit from having an employee hanging around just because they can't afford to exercise their options. If they want to leave but can't because they have this huge potential for loss hanging over them does the company really benefit from having them there when they don't want to be?

dlubarov5• 11 years ago

It would make their offers more appealing to prospective employees with limited capital.

pdpi• 11 years ago

It reduces anxiety. Say you are slightly unhappy at your current job. On a normal stock plan, you might start feeling that "golden handcuffs are tying me to this company", which makes you feel even worse about your position, and might actually precipitate you leaving.

Now, consider this policy instead. You'd get a feeling of "I could leave if I really wanted to, nothing is tying me to this place". You get a greater feeling of agency, of personal freedom. That relaxes you, and you feel more comfortable staying with the company.

brown9-2• 11 years ago

The employer has to weigh two options:

- people will be less encouraged to leave with the current standard of expiring options.

- people who have checked out mentally will not be forced to stay with the company for financial reasons.

bsder• 11 years ago

What argument is there for this policy against the employer, besides it's a nice thing to do?

You don't get stuck with an unmotivated employee who has checked out but can't access his options in liquid form.

This is not an infrequent problem in startups. The folks who "storm the bastions" early on often do not have the skills nor the desire to be a "well-behaved corporate citizen" for IPOs and such.

r0naa• 11 years ago

Wow. That's amazing, Pinterest is amazing! This is a great move: Pinterest you rocks!

rokhayakebe• 11 years ago

Why companies give early employees options to "buy" stocks? Why can't they just be granted once vested and be done?

wpietri2• 11 years ago

Taxes, mainly.

If you are very early, when the company is worth nothing, then the company can give you a big chunk of stock with no tax consequences. But once the company is worth something, then getting the stock is income, and you have to pay taxes immediately on the market value. It's not as good from the company tax perspective, either.

It's also a problem in that if the stock is already valuable, giving you the stock is the wrong reward structure. Companies are giving you options so that you have an interest in the stock going up. Suppose when you show up the share value is $40 and they give you 1,000 shares. if while you're there the stock goes up to $60, you will have received something worth $60,000, even though you only contributed to creating $20,000 of that. With options, they can give you 3,000 options with a strike price of $40. If the stock goes up to $60, then you still make $60,000 ($20 gain * 3000 options). But if it doesn't go up at all, then your options would be worthless.

dlubarov5• 11 years ago

you only contributed to creating $20,000 of that

That's an interesting way to think about it, but as long as the employee is getting a base salary, the employer couldn't justify granting enough options to achieve this goal of compensation being equal to (theoretical) value added.

If we consider base salary fixed, then options are more leveraged, but a similar reward structure could be achieved by granting the same number of RSUs and reducing base salary by the exercise cost.

corysama• 11 years ago

If you receive a nice grant of stock from your company, it will probably be few years before you want to sell that stock for cash. In fact, it will likely be several years before there is a reasonable way to sell the stock even if you wanted to. Selling stock in a privately-held, early-stage startup is often not a simple matter.

Despite that, the US IRS will want you to pay taxes on the current value of that stock in cash this year. The IRS doesn't care that you don't have the cash. And, they don't care that there's a very large chance the stock will turn worthless before you can sell it for cash.

Options however are not taxed until they are exercised. In practice, exercised options are usually converted directly to cash. That makes paying the taxes much easier. And, if the company folds you get nothing, but at least you didn't pay taxes up front on a stock that turned worthless.

So, it's a bit complicated, but options are usually more friendly to employees than direct grants in general. Details in the options like "What happens to my options if I leave the company?" are important. They can also be complicated and possibly employee unfriendly. I'll leave the discussion of that detail to the rest of the crew here.

staunch• 11 years ago

Employees should start refusing to work anywhere that does it the "standard" evil way.

caseyf73• 11 years ago

It's great they are giving new employees some flexibility here. It would be really hard to exercise a grant on an $11 billion valuation. Especially without knowing the details of the liquidation preferences.

t1m• 11 years ago

The US should follow Canada's lead and not tax exercised options until the stock is sold and actually becomes income.

http://www.taxplanningguide.ca/tax-planning-guide/section-1-...

aero142• 11 years ago

Even just only taxing it once it is sellable stock would be a huge improvement. Getting stuck with a taxbill for something you can't actually sell is ridiculous.

rsync• 11 years ago

Phantom Stock:

http://en.wikipedia.org/wiki/Phantom_stock

"Phantom stock grants and vesting agreements align employees' motives with owners' motives, i.e. increasing stock prices, while avoiding both taxable compensation and the need to give recipients voting or other rights typically associated with shares."

hkmurakami2• 11 years ago

This would already be true in the states if not for AMT. :(

dlubarov5• 11 years ago

Only for ISOs though, not NSQOs.

7Figures2Commas2• 11 years ago

Yes, there's the AMT trap for ISOs, but there's also an AMT credit that nobody ever seems to talk about, so net-net the AMT issue typically isn't as bad as some people make it out to be.

GuiA• 11 years ago

I exercised some ISOs recently and my accountant told me that they weren't taxed until I sold them?

ryan-c• 11 years ago

In the US, the difference between "fair market value" and exercise price is subject to AMT. The short explanation is that if you exercise ISOs, you need to calculate your tax under AMT rules (which consider the spread taxable income) as well as normal rules and pay whichever is more.

wdr1• 11 years ago

It'll never happen. It'll be perceived as yet another tax break for the rich/well-off. :(

walshemj7• 11 years ago

And the "socialist" UK which does this and even gives employee share options special exemptions eg you can transfer vested options into your ISA with no tax.

arethuza2• 11 years ago

Doesn't the company have to run an "approved" share option scheme to get all of the tax benefits? I've been offered "unapproved" options before (not recently though) and they would have been pretty ruinous as I think I would have to paid income tax on them and CGT on any gains.

mseebach• 11 years ago

Can you elaborate on this? It sounds like it would be very useful for me in my current situation.

arenaninja• 11 years ago

This is sensible. Bravo Pinterest

jedberg5• 11 years ago

FWIW, Netflix gives you 10 years. Despite the fact that I left a few weeks ago, I still have about six years left to exercise them.

mrgriscom• 11 years ago

Why haven't you? Aren't they public?

fsk6• 11 years ago

If the options aren't that far in-the-money, and he doesn't need the cash now, it's actually better to wait to exercise.

If he exercises now, he only gets the raw value (current price - strike).

If he waits to exercise, he get the time-value of money and implied leverage (he doesn't have to cough up the strike until he exercises), and the optionality part (if Netflix goes below the strike, he can decline to exercise).

He also can hedge by short-selling (and lock in a sure profit no matter what), but you'd need a big-value account at a brokerage to hedge on favorable terms.

vanessa98• 11 years ago

Left to go where?

jedberg5• 11 years ago

At the moment, home to my 3 month old daughter. :)

I probably won't look for something new for a while.

harryh• 11 years ago

Was this true pre IPO?

jedberg5• 11 years ago

I don't think it was.

mherdeg• 11 years ago

Is that a better deal than Quora's "you may exercise options within 10 years of grant date, whether or not you still work for the company"? Per http://blog.samaltman.com/employee-equity .

codezero• 11 years ago

Really depends on the average tenure of the employees. In general, I think Pinterest's is better. Also, Quora only offered that to employees recently, 5 years after the company started, so any employees that left before 2014 when that was enacted wouldn't be entitled. It's possible the same is true for Pinterest though.

choppaface6• 11 years ago

I've nearly gone bankrupt due to AMT on ISOs, and I've also been forced to put up considerable money to exercise Non-Quals after leaving the company. I definitely applaud Pinterest's move here. My former employer went public, the top execs are still making a ton of money, and yet Finance still hasn't implemented a similar post-termination plan. A lot of former colleagues are still at the company due to 'mildly-golden' handcuffs-- the tax liability that their options present is now large and complicated. Companies that fail to adopt changes like these disadvantage themselves in a variety of subtle but important ways.

What would be even better is if smaller companies / start-ups just did 83(b) elections up-front (say on day one or year one upon cliff). Another (for larger companies) option is to just offer RSUs.

The bottom line is that opportunities via tax law complexity are not particularly motivating to the majority of employees (i.e. ICs), and yet ICs are the most likely to suffer near-bankruptcy due to unexpected income tax. This is a nice step in the direction of transferring deserved wealth from 'the top' to ICs, but there's still plenty of progress to be had.

darkarmani3• 11 years ago

What would be even better is if smaller companies / start-ups just did 83(b) elections up-front (say on day one or year one upon cliff). Another (for larger companies) option is to just offer RSUs.

I was giving the choice and I elected 1/2 RSUs and 1/2 stock.

choppaface6• 11 years ago

Curious, why didn't you take 100% RSUs? Would they have just given you fewer RSUs?

ridgeguy• 11 years ago

Agree that more use of 83(b) would reduce the frequency of startup equity taxation horror stories.

The value of startup equity, given all the risk factors and historical outcome data, is extremely low. It's usually easy to show that an entire startup is worth less than $1K. Using 83(b) to pay tax on the equity FMV when awarded rather than when vested/exercised/etc can make a big, big difference. If you win the equity lottery, that is.

http://en.wikipedia.org/wiki/Restricted_stock

beagle35• 11 years ago

But for 83(b) to be feasible, the company has to be worth essentially zero.

Let's say you join a startup that the IRS can claim is worth $20M (based on e.g. money raising valuation), and get 1% in RSUs worth $200K - depending on your other income that year, the tax bill can easily be close to $100K (if you made $100K in salary and live in NYC) for doing an 83(b), and it is still likely to be worth zero being a startup.

And before you say "the fact it raised $2M on $20M makes preferred reflect that value, not common which is still worth zero" - that is a common position, and the IRS almost never challenges 83(b) election valuations - but are you willing to risk that they won't start challenging them? I gave up more than one offer because I wasn't.

The bottom line is that the US tax system's taxing of virtual, unrealized, unrealizable profit is insane - I am not aware of any other western country that does that.

choppaface6• 11 years ago

Hmm, in my case the 83(b) election would have cost me about a quarter year of salary, and the AMT I ended up owing was well over a year's worth of salary. My original grant was small relative to the pool because I was a mid-stage IC with essentially no prior experience. Perhaps for very early startups, or those growing quickly through valuation raises, the situation is different. My company only took on capital when we really ended it and it was cheap, but the C-levels were pretty consistently getting offers (so the valuation grew constantly, just not on paper).

Agree that the taxes on unrealized gains are insane, but they were intended to protect the government's income source from different problems. Tech compensation and VC has evolved dramatically since AMT was introduced.

Eridrus• 11 years ago

Early exercise still seems like a better option than waiting if there is a positive exit event since you get to pay capital gains rates, rather than income tax rates if you hold it for more than a year.

It certainly depends on how much risk you're willing to take on though.

atishd• 11 years ago

Here are a couple of must-reads if you have received ISO, NSO, RSUs: https://equityzen.com/blog/understanding-rsus-like-your-boss...

https://equityzen.com/blog/understanding-equity-compensation...

Disclaimer: I'm with EquityZen. EquityZen helps employees get liquidity for some of their options/shares before the company exits, so not only can they afford the exercise, but also finance life events.

grellas• 11 years ago

A few technical points:

1. U.S. tax law requires that incentive stock options (ISOs) have a 90-day termination tail on them - that is, the options do not qualify as ISOs if they are not issued under an enforceable agreement by which all vested options must be exercised within 90 days of termination of employment or expire.

2. As a direct result of point 1, the near-universal practice that startups use when issuing stock options is to require employees to sign documentation by which they agree that they lose even their vested options if they do not exercise them within 90 days of their termination date.

3. The original idea behind ISOs (the reason for distinguishing them from "non-statutory" or "non-qualified" options) is that they can be exercised at any time after they vest without triggering ordinary income tax for the exercising employee at the time of exercise (subject to certain monetary limits).

4. However, the "benefit" note in item 3 above, though a very real benefit in days gone by, is often illusory today because the exercise of ISOs requires that the amount of the spread (difference between exercise price and fair market value of the stock at the time of exercise) be included as an item of AMT - meaning that a so-called "ISO" exercise can result in a huge AMT tax. What this means is that an employee holding vested options in a startup whose value has risen greatly faces a dilemma. "Do I exercise now, pay a huge tax, hold only a piece of paper that may or may not be worth anything down the road, and hope that the stock price holds? Or do I wait until a liquidation event, exercise at that time, and thus eliminate the large tax risk of exercising before that time?"

5. Of course, many such employees chose to wait. If you cannot sell your stock right away, it is a very high risk to pay a massive tax on an option exercise only to wind up holding illiquid stock that may become valueless if things don't go right. This is no small issue. People committed suicide during the dot-bust era a decade or so ago after having made the wrong decision.

6. The problem is exacerbated by the 90-day expiration rule on employee termination. It is one thing to wait and wait until the liquidation event. But what if it is a long time in coming? Many employees are trapped in their employment when they face the above dilemma because leaving their employment will force them to exercise or lose potentially valuable options if they don't exercise within 90 days of termination. Even worse, if their employment is terminated by the company, they are put in the horrible position of losing something they worked very hard for because of a seemingly arbitrary and stupid rule saying that the options expire within 90 days of termination.

7. Well, guess what, the rule is stupid and arbitrary in many ways. Why? Because, though the law requires that it be made part of any ISO grant, this does not mean that the startup cannot modify the agreement for the benefit of the employee to eliminate the 90-day expiration provision and to give the employee room to exercise for an extended period. What happens when the company does this in spite of the tax rules? Well, it means that the option loses its character as an ISO. But it does not lose its character as a legally enforceable stock option. It just means that it is taxed as an NQO (non-qualified option). So, in a worst case, the employee exercising an NQO gets immediately taxed on the spread at the time of exercise. But, if that modification gives the employee the flexibility to carry the options unexercised but exercisable for a period going well beyond the 90-day period currently defining expiration of such options, the employee can leave employment, hold the options, and wait for such extended period (e.g., the 7 years discussed in the article here) before deciding whether to take the tax risk of exercising and holding illiquid shares. And, if, in the interim, the company does have a liquidation event, then the employee's dilemma vanishes and he can exercise and sell right away in order to make the profit and pay the associated taxes.

8. The net result of the startup's agreeing to eliminate the 90-day provision is that employees need no longer feel trapped in their employment once their options have vested when the stock price becomes high. They can leave and still keep the option of cashing in on their hard-earned options.

9. So why don't most companies agree to such modifications? Their lawyers will tell you that the law requires the 90-day rule and this is true but misleading because that requirement can be violated in a lawful way that simply changes the character of the options. Thus, if the parties can live with the change, why not do it routinely? Well, I leave it to everyone to draw his own conclusions. Perhaps startups want to keep their employees trapped. Perhaps they are just listening to lawyers who insist on following the rules. Or perhaps a board of directors does not feel it consistent with fiduciary duties to give employees something that appears to be a gratuitous modification that does not benefit the company. Whatever the reason, it remains true that most startups choose to leave their employees trapped in this dilemma without even giving them a good explanation beyond the fact they agreed to the condition and that the the tax laws "require" it.

In any case, kudos to Pinterest for doing the decent thing here. It is indeed all too rare to see something like this and they are to be congratulated for it.

sgustard• 11 years ago

Is there any downside to Pinterest, other than the legal costs of working this out? Increased scrutiny by the IRS? Or just, as the article implies, some loss of golden handcuff leverage over their employees?

rozap• 11 years ago

Not just leverage over their employees, but they (ie: not pinterest, but most companies) also get to claw back all the options left un-exercised by employees that do quit.

defen• 11 years ago

I find a lot of this stuff hard to follow, but your post laid it out well in an easily understood format. Thank you.

bsimpson• 11 years ago

Thanks for the excellent write-up. How'd you become so knowledgeable?

davidu• 11 years ago

He is a startup lawyer.

JonFish85• 11 years ago

One thing I don't see addressed is what this means regarding dilution and such. With something like this, is the company more likely to dilute its stock to try to dilute out people who have long since left the company?

If Joe Schmoe leaves the company with, say, .05% of the company, and in 7 years those shares would be worth $25m or something, wouldn't the company want to dilute that person out in order to give their current employees value?

I guess I don't really see what the big deal is on this. It would seem to me that the company would aggressively issue more stock to ensure that anyone who left the company 7 years ago couldn't possibly control more stock than current employees.

dlubarov5• 11 years ago

As long as the board doesn't do anything really shady, dilution generally affects all shareholders equally. (Well, the effect can be slightly different for preferred stock holders, but at least former employees will generally be in the same boat as founders and current employees.)

throwaway3010• 11 years ago

I brought this up recently in a negotiation and the response was that 5-10 year exercise timelines would hinder an acquisition.

Makes no sense to me, but is this a real possibility?

vinceyuan• 11 years ago

Wow! Pinterest is so generous! In my previous company, I had to exercise my options in 3 months after leaving. Now that stock's price increased by 50%.

luckydude• 11 years ago

We've been trying to figure out how to do this, does anyone have the legal language that says how this works?

pcarolan• 11 years ago

Way to set a good example.

downandout2• 11 years ago

This ties into the whole issue with bloated valuations [1]. VC's are paying for preferred shares and other deal points that make all classes of shares appear to outsiders to be vastly more valuable than they are. Employees then wind up paying inflated taxes on value that doesn't actually exist. The valuations are mostly made up, but the taxes are very real.

[1] http://www.bloomberg.com/news/articles/2015-03-17/the-fuzzy-...

dlubarov5• 11 years ago

But taxes are normally paid based on the latest 409a valuation, which can be way below the preferred stock value from the latest funding round.

My impression is that companies rarely sell common stock to investors for that reason (among others). Since investors valued the preferred stock, common stock holders can ignore their massive valuation for tax purposes, and use the 409a.

downandout2• 11 years ago

Still, an appraiser brought in to do a 409a valuation wouldn't be doing their job if they completely ignored the valuation from the latest funding round. The value will be lower by a subjective amount determined by the appraiser, but is still likely to be somewhat inflated if the preferred rounds were also inflated.

cbhl• 11 years ago

Why is this better than Pinterest covering the tax bill for employees that leave and/or are terminated? Is the latter impossible or impractical for some reason?

throwaway85• 11 years ago

Love this move. I, like many here, am feeling this squeeze after being terminated from a startup in the 1B club. I need to decide to exercise or not. I don't have the cash for the taxes.

Does anyone who has found buyers for their private stock without the company's blessing care to post about their experience? Any recommendations for brokers or investment groups that engage in such transactions but aren't predatory? What snags did you run into and how long did the process take?

mavelikara• 11 years ago

http://www.esofund.com/

Pinterest lets employees exercise options 7 years after leaving

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