Speaking as someone in a (very) late stage startup, I'm far more curious how many of Dropbox's employees have options plans that are about to expire on them if they don't exercise...
Most decent companies will make it up to you by issuing you new options with the same value or otherwise compensating you for the expiration of options you can't exercise, in some cases they will simply buy the shares from you, giving you your "exit".
Unless the ability to exercise such a “discounted” stock option is limited to certain predetermined events or specified dates, the option is taxed as soon as it vests, regardless of when it is exercised or whether it was intended to be a non-qualified or incentive stock option.
Now, you could try backdating, but that's probably ruled out by the option plan, and could be viewed as fraudulent depending on circumstances.
Of course, the employer can issue new options based on the current FMV of the company... but for anyone in this situation, that probably means a substantial loss as the new strike price will match the current valuation of the company.
As for paying the employee out, I've never heard of that happening in practice... and it has its own pros and cons, the most obvious being that you're now out of the game if there's a subsequent liquidity event.
But there is a >0 number of people at late stage companies who effectively cannot leave without losing lots of money.
Following FB having so many shares on the secondary market, some companies restricted the sales of their shares.
Usually, if you don't exercise shares within 90 days of leaving a company, they disappear. Let's say you have $100k in shares at your strike price and you exercise them and have the money to do so. Great!
But now in the eyes of the government, you owe taxes on the money you "made" even though they are illiquid. So, you could theoretically be forced to pay taxes on millions and millions of dollars of shares, for which you have to date received $0.
It totally screws the early employees with options. You're stuck with losing that equity or paying for theoretical money. If the IPO goes south, you can only deduct $3k in capital losses per year, although the loss is rolled over to follow years.
If you use your options and the company goes under before IPO, are you effectively shit-out-of-luck? Seems like you would get $0 for the shares but already paid taxes on them. Would you get those taxes back in a future refund if this were the case?
> If you use your options and the company goes under before IPO, are you effectively shit-out-of-luck?
"Goes Under" can mean different things, if it is failing and bought out, you get whatever it is bought for.
If it is dissolved (either in bankruptcy or otherwise), you get whatever the claim against assets in dissolution provided by your shares entitles you to -- which in bankruptcy is likely nothing, because creditors come first, and if there was going to be something left after that, the firm wouldn't be dismantled in bankruptcy.
> Seems like you would get $0 for the shares but already paid taxes on them.
I'm pretty sure you'd have a capital loss from the difference between the value finally realized from the shares and the price at exercise, which is applied against any other capital gains in the same year (and, with limits, against other income, with the excess carrying over to the next year, etc.)
> which in bankruptcy is likely nothing, because creditors come first, and if there was going to be something left after that, the firm wouldn't be dismantled in bankruptcy.
Bankruptcy might also be caused by a few debtors being excessively late in payments, and you have your own debts to pay.
If e.g. my debt of 10K is due at 30.07., and I have 100K outstanding from my customers (and not enough cash flow/reserves to cover), then by 30.07. I am bankrupt, and it may well happen that at 30.08. my debtors pay the 100K - but then it is too late for me.
The taxes owed after exercise are actually under AMT. It is an AMT credit that carries forward equal to the tax paid that can be used in the next year where your conventional tax liability exceeds your amt liability. Any unused portion carries forward.
But it wasn't always this way. After the bust in 2000 lots of people owed real tax liabilities despite no real financial gain and had to pay them off. The credit came later.
If your employer doesn't offer to buy the shares back, it's a pretty clear signal how much that equity is worth. Pay attention to that when you choose to exercise.
I am pretty sure that every option I have received vested in some period of time and then expired after a longer period of time. Nearly all of them vested in 4 years and expired in 10 so if you were at the company for more than 10 years it would expire if you hadn't exercised the option.
There's a whole crop of companies / people in this situation. I'm wondering if new hires register this as the glaring red flag it should be with respect to how companies treat the people that got them to where they are.
