Actually, it is not. It only seems complicated because it is backed into after calculating the regular tax when you use the IRS tax forms. In other words, first you calculate ordinary tax, then you make plus/minus adjustments for the things that are different under AMT.
If there was a Form 1040-AMT which simply calculated the AMT the same way we calculate regular tax, you would see that it is actually simpler than ordinary tax. (depreciation is simpler, itemized deductions are simpler, personal exemptions for kids go away, the standard deduction is much higher, and so on).
If we did it the other way around - calculate AMT first, then make adjustments to back into ordinary tax, then you'd say ordinary tax is complicated.
Most people don't understand that under the TCJA temporary provisions enacted in 2017 and expiring in 2025, most of the changes just involved moving AMT provisions into the ordinary tax calculation.
As you said, the tax code requires you to calculate your taxes twice - once using the "normal" rules, and another time using the AMT rules, and you pay whichever is higher. So, depending on your individual circumstances, it's non-trivial to know if AMT will apply to you when making particular money movements during the year. Also, if you have to pay AMT in year one, but then in year two the calculated AMT is below your normal tax calculation, you get a credit for the excess amount (i.e. amount over the normal tax from year 1) up to the delta between the normal tax and the AMT amount. In other words, AMT can often times just cause tax to be paid earlier, but the total amount of money (over years), ends up being the same. Of course, the time value of money comes into play - paying a tax earlier is losing money.
So, point being, there are complicated considerations to take into account.
So that all said I agree with the author's take of "maybe" exercising before an IPO is worth it. This is my first time in a role where I've actually got pre-IPO Options. My last role I joined right before the company went public. The agreement there was that I'll get x$ worth of shares where the quantity is determined by the price 3 months or so after the IPO. They went from >$100 per share to like $30 a share which coincided with when I was assigned my shares lol. Oh well.
You'll miss both. A 6-month lockup is typical. Sorry, do not pass go, do not collect on the "pop"
And it can motivate employees to stay at the company way beyond what's good for them, as leaving the company means either abandoning your equity or exercising your options and paying real money for a very risky and illiquid asset. My 2c.
When you cofound a company, its not the equity percent, but who is in control that matters. If you have 40%, and they get 60%, but legally or otherwise (you are the face of the company), then you have control and the 40% is worth more than the 60.
If you leave early after cofounding a company, there is no saying what happens to you shares, and likely they will be diluted to almost nothing
Its all about control.
If you are an employee, either go for a company thats a few years from IPO, a generational startup, or consider the equity worth 0.
Or you get impossible performance plans placed on you (that their buddies wont get) which will mean you either achieve the impossible or you lose your founder stock.
If you are giving up voting control, ensure to get a secondary sale to sell some of your stock (5-10mil) so you're set for life. Then you can let the VCs burn the company down...if you really want.
The real answer is that it is probably not worth anything unless they have stock liquidity events that only a handful of large startups have (e.g. Stripe.)
If you dont have that, the price is purely theoretical. Further, if you cannot see the cap table and the preference overhang -- and most startups wont let you see it -- then you have no idea what the real price is regardeless of a theoretical 409A value.
Even if you can see the cap table, spending today-dollars and exercising options for the right to sell stock 5 or 10yrs into the future almost never works out -- the cone of uncertainty across 5 or 10yrs is far too great. The better move would probably to be to use that money to purchase long-dated LEAP call options on the Nasdaq Composite
Realistically, investors get their money back first, so 50% (picking an arbiter number) of that valuation value won’t ever been seen by employees. Then it gets even worse with multipliers and preferences.
Preferences also don't stack with the rest of a liquidity event. E.g. say an investor puts in $100m at a post-money of $1b with a 1x liquidation preference. If the shares go for $900m, the investor gets back their $100m, and that's all. They don't lose money, but they don't make money either. If the shares go at a $1.1b valuation, the investor converts their preferred shares to common shares like everyone else has. The investor doesn't get their money back first and sell more shares on top of that. It's either/or.
But I do assume the 409A for the fair marker value of the common stock takes these into account? Not a US tax expert :-)
While the points about uncertainty of options are quite accurate, this detail isn’t really true.
For the most part a 409a is the lowest reasonable valuation the company could talk the auditors into accepting. The lower it is the less tax paid and everyone knows that.
There are places that will, no recourse, loan you the money to exercise and pay the tax, in exchange for some percentage of the profit, provided it's for a company they like. Meaning, they lend you the money, but if there's no IPO/liquidity event, you don't owe them any money. 70% (say) of a big number may not be as big as 100% of a big number, but 100% of zero is $0. Which isn't financial advice, just a bit of math.
I don't think this is ever worth the risk. If you're even thinking of doing this for QSBS purposes... the amount of tax you'd incur is way too much. Even if you have "excess" capital, you may as well put the $50k+ into a shitcoin and you'd see a much quicker return (or lack thereof). For most people where $50-100k+ in tax is a trivial amount to worry about, why are you joining as an employee? Clearly you've made a lot of money in the past... Just be a founder instead. You're taking on just as much risk.
> If you join an early stage company and you don’t have much capital, don’t do anything just yet. Try to negotiate for an extended post termination exercise window.
For 99%+ of people joining startups as regular employees, this is what you should be doing. If you leave the company before it becomes liquid, exercising the shares can be super risky. We've been waiting on several very well known companies to go public for a long time now. Who knows when they'll go public. At that point, you've spent possibly hundreds of thousands to exercise your shares, hundreds of thousands more in taxes... and they might be worthless and you can maybe deduct $3,000/yr for who knows how long.
> If you can get liquidity at some point, and you think liquidity would improve your life, you probably should.
It is unlikely though.
IMO, until tax law (and especially market conditions) changes - I do not believe in joining any private company unless you are convinced they will IPO within the year. This is assuming you care about compensation significantly.
1. the founder already has generational wealth and this current company means practically nothing to them.
2. they've already learned every trick in the book to keep the company's value in their own pocket and out of the hands of their employees.
The founders, early investors, etc., will cash out way before you do and you will not have the same ability to sell as they did. I’ve seen it tear companies apart. YMMV
Oarch•4h ago
Yet could AI feasibly generate a similar (or better) app in a few years? It used to be unthinkable. Now, I'm not so sure.
The development cost of software could feasibly drop to negligible levels. It no longer seems like sci-fi, more and more it seems like the inevitable direction of travel.
What happens to my equity? Welp. Might not be great news.
haxton•3h ago
edoceo•3h ago
Here's some older stats (2017) https://berkonomics.com/?p=2899
But searching, you'll find loads more studies on startup/angel/seed.
It's like, optimistically, 1/20
Oarch•2h ago
Aurornis•3h ago
A lot of acquisitions are made by companies that could re-build the acquired product themselves. They’re buying the business, brand, and customer base, not the app.
ldjkfkdsjnv•3h ago
henry2023•31m ago