And that's why options are (mostly) a scam. If you leave before a liquidity event for any reason (they may not come, they take a long time, life circumstances, poor career growth, employers like to give shitty raises), you're stuck either investing often tens of thousands of dollars into an illiquid investment while paying taxes on it right now, or giving up your options. Sweet deal for employers either way. So when they hand out those option grants they probably get to apply a 50% discount or more to exercise.
Not to mention employers often try to avoid even telling employees what fraction of the total company their options represent, and definitely don't care to share their participation multiples. They're often very happy to let you think that in the case if a liquidation event, you get (exit amount) * (your ownership fraction) which just isn't true.
@apta: see [1] for a numerical example. You get taxed twice (or three times if someone is stupid) on typical ISOs:
1 - on grant, if the strike is less than the fmv (there are huge tax penalties for this, both for you and your employer, so it oughtn't happen)
2 - on exercise when you convert the option to a stock, on the spread between fmv and strike (but probably amt, depending on the type of option; it's mildly complicated)
3 - on sale of the stock, on the spread between the sale price and your basis
If someone won't tell you the number of shares outstanding then you should value it during hiring negotiations at zero. I've had two potential employers (over 16 years) try to pull that on me and I was sure to tell them how much I thought their equity offer was worth during salary conversations. They both eventually produced information on company structure and valuation. It always helps to ask :)
> you're stuck either investing often tens of thousands of dollars into an illiquid investment while paying taxes on it right now
I am not really familiar about this area. It is a one time price to pay to purchase the stock options, is that correct? Furthermore, where does tax come into play? Don't you only get taxed if you decide to sell the stocks to generate income?
From how I understand it, when you decide to exercise your options (pay the strike price), you owe taxes on the different between your strike price and current fair market value even if you don't sell the stock. Most of the time, this counts as AMT (Alternative Minimum Tax) if you don't sell the stocks within the same tax year.
You have to report the "paper capital gains" for AMT purposes but that doesn't necessarily subject you to paying the AMT. And if it does, you will at least get AMT credits you can apply towards future tax years.
Not to mention employers often try to avoid even telling employees what fraction of the total company their options represent, and definitely don't care to share their participation multiples. They're often very happy to let you think that in the case if a liquidation event, you get (exit amount) * (your ownership fraction) which just isn't true.
@apta: see [1] for a numerical example. You get taxed twice (or three times if someone is stupid) on typical ISOs:
1 - on grant, if the strike is less than the fmv (there are huge tax penalties for this, both for you and your employer, so it oughtn't happen)
2 - on exercise when you convert the option to a stock, on the spread between fmv and strike (but probably amt, depending on the type of option; it's mildly complicated)
3 - on sale of the stock, on the spread between the sale price and your basis
[1] https://news.ycombinator.com/item?id=7611512