My experience was similar, right down to the $10,000 worth of options. Eventually the company went public and those options would have been worth $5M if I'd had the foresight (and cash) to exercise them (which I didn't). The co-founders did not have exercise costs or AMT of course. It is an unfair system indeed. I'd encourage those seeking to be early engineers to go work at a FAANG for a few years before joining a startup so that you have the cash reserves to take the risk.
AMT rules requiring you to report exercised options as income are damn-near criminal, IMO. If you can early-exercise at grant time, file your 83b election, and avoid taxes, great. But if you can't afford it, and want to see anything from that equity, you are stuck staying at that company at least as long as the first liquidity event.
I think the takeaway here is that you should probably not work at a startup if you don't have the cash to early-exercise your option grants (or work there, but value the equity portion of your comp at $0 and be ok with that). Obviously you didn't know or consider that at the time, which is a pretty common level of understanding, I think, one that I shared when I was first dipping my toes into the startup pool myself.
On the plus side, I think financial education and knowledge around startups has gotten leaps and bounds more prevalent over the past dozen years or so. Fewer people will experience the same situation you do, because they'll know not to get into it in the first place. And once enough people understand the implications of these unfair practices, they will have to change if startup founders and investors want to continue to attract talent.
The options were likely 10k when he was issued them at hiring. When leaving the company, he would need to purchase those options (likely within 90 days if it's a shitty policy). Then, the real kicker is that he would have to pay taxes on the on-paper gains between the 10k and the current valuation. So lets say the company was worth half of what it was at IPO, he would now own 2.5m of stock, owe taxes on 2.49m of income, and have to pay that off with early engineer salary and no liquidity on his equity.
>> No liquidity? He said the company went public…
>> I know people don’t get the best deals on startup equity but something doesn’t add up here
Many startups stay private for 7-10 years. Most go broke, shut down, or have face-saving acqui-hires with no economic gain. If you leave at year 1,2,3,4,5, or 6 you have to pay UPFRONT to exercise the options and pay taxes UPFRONT. But you are stuck with private stock you cannot sell. In 95% of cases, the private stock can never be sold because the company goes broke. You dont know if your company, in year 7, 8, 9, 10, or beyond MIGHT be one of the lucky 5%
If you are going to spend $100k or $500k exercising options and paying taxes, you might as well buy QQQQ or NVDA or something with better odds of success.
