Startups should move to the 5 year exercise window. We've made this change at Ockam. Here's a list of companies with extended exercise windows

https://github.com/holman/extended-exercise-windows

Unfortunately, if the window is larger than 90 days, they become NSOs and the difference between the strike price and the FMV is considered regular income, with withholding required immediately. You then have to pay capital gains when you sell, so you're actually taxed twice.

This is not true with ISOs (it is considered income for AMT but that affects fewer people and you can get AMT credit to claw it back in future years).

The tax laws around stock options really need to be reformed, they encourage employees to take on undue financial risk, especially for non-public companies.

Actually this is still better than options no? Paying capital gains in exercising options at some illiquid valuation is somethng I just can't see the justification behind. If the asset is paper money shouldnt the taxes also be paper money?

Compensation that can't be traded for cash should be valued quite close to zero, regardless of the length of the exercise window.

Revealed preferences indicate equity compensation isn’t valued by would-be-employees at “quite close to zero” even if you think they ought to. I think start ups would be very willing to throw in an extra $5 and skip the equity grant if that’s what employees wanted.

And people don't value lottery tickets at zero, eventhough most of them end up worthless too. It's the betting mindset of the individual that determines if one values these types of items.

There’s a fine line between warning people if something they might not be aware of and being a scold because other people happen to value things differently than you do.

There's a lot of hope that goes into this. I have never had a stock option that was worth anything in the course of my career.¹ I stopped counting that as a factor long ago.

1. I can actually go one better on that. I worked at one company that had a "can't lost" stock purchase program. You put aside money with each paycheck and you would get stock purchased at the lower of the price at the beginning of the year and the end of the year with a 10% discount. Of course in the time between when the shares were purchased at the beginning of January and when they were delivered at the end of January, the stock fell 50%. They never recovered their value and I ended up getting cashed out when the company that bought them went private at around 10 cents on the dollar.

This happened to me too! Only it was a large public company. Employee stock purchase plan was 10-15% discount. Between Thursday afternoon purchase and Friday delivery of shares, company announced earnings and shares dropped like 20%.

Employee stock purchase plans are different than stock options.

I am well aware of that. My point is that these non-cash compensation plans have inherent risks.

Is it really revealed preference? Or lack of choices? Or people being misled?

I don’t think it’s lack of choice. Any dev that can land a job at a VC backed start up could probably get a job at a dinosaur and sometimes a public tech company (i.e. FAANG+).

I do think there’s an element of being misled, but less so than there used to be. We’ve now had twenty plus years of industry veterans grumbling on the internet about being screwed by equity. The info is out there.

Sometimes people just want to roll the dice. It isn’t up to us to tell them they can’t want that.

It's a 'feature' of a startup. You become an investor in the company.

The other option is to work at a public company, where stock is liquid.

They aren't really comparable, and a preference for one or the other is personal choice. Both are correct answers.

A lot depends on pay. If your startup pay is identical to your public pay (say 2 competing job offers), you paid $0 for some amount of options.

Now if your pay is 25% down, you paid 25% of your salary for those options.. +/- a slightly different lifestyle and feel for the company, which is interesting to many.

A stock option is the right to become an investor at, hopefully, a preferential price assuming that, hopefully, the option is still exercisable. Both legally and based upon your personal circumstances in the future.

In contrast, a true and immediate equity grant is becoming an investor.

People like to fuzz these concepts but they are different in principle.

FYI to stock option noobs: 83(b) Election: is a provision under the Internal Revenue Code (IRC) that gives an employee, or startup founder, the option to pay taxes on the total fair market value of restricted stock at the time of granting.

During this election you pay for your shares at the beginning (usually the cheapest strike price you will ever get). This lets you take advantage of capital gains rates. Do this! I also advise exercising if you have a 90 day window if the company has any type of profit or product, remember! you do not have to exercise 100%!

Note the granting party has to allow this, one cannot unilaterally take their granted options and make an 83(b) election. It’s often a smart thing to do, but it’s not quite “One Weird Trick” to pay less in taxes.

It is worth asking during negotiations, especially if company is pre-money and the strike price is under a cent. There is no measurable cost to it for the employer. Oftentimes founders are unaware that this is something they can even offer.

can you do an 83(b) election on options though?

You usually aren't given RSUs at a deep discount as mostly only public companies issue RSUs

This is always what I have heard as a founder trick, to 83b on a c-corp and basically turn their initial stock into pure capital gains.

For us small timers doing a LLC, we don't need to mess with 83b. Created the company from nothing, it is automatically going to be a capital gains.

* Based on my convos with my accountants, not tax advice, blah blah.

Why do employees not negotiate for actual vesting stock as opposed to vesting stock options?

For tax reasons. If you are given stock you'd have to pay income tax on it when you receive it.

Exercising options is also a taxable event. If the difference between your strike price and fair market value at time of exercise is large enough you can find yourself in AMT land where you have to pay the tax on "profit" that you can't access because you've purchased an illiquid asset.

It gets worse than that. During the dotcom bubble pop, a lot of people ended up paying taxes on profit that was actually a loss because the stock value tanked after exercising. There were multiple cases of employees owing more in taxes than the value of their stock.

Yes but with options you have the option (heh) to control when and even whether you exercise (and thus pay the taxes). Options are a bad deal compared to RSUs in a lot of ways but this is their one big upside.

The whole point of options is to let you defer exercising until it's not an illiquid asset (which is why the 90 day exercise window is a problem).

You can always pay the tax in stock itself at the time, though.

Not if the company isn't public; the IRS doesn't take shares of stock, you need to be able to convert it into dollars.

This is only true if there is a market for the stock (including if the company will buy back a portion from you, which many bigger startups will do) as far as I know. The IRS won't accept company stock for tax payment, it has to be turned into cash.