> Nowadays, stock options given to employees often end up being worth nothing, even on a successful exit.
This seems unlikely.
Exits and IPOs have much greater valuations now than they did ‘back in the day’ so far more early employees end up with a significant infusion of cash.
Super-early employee here. Pay for your options your first day of employment. They should be inexpensive; and your employer should be willing to give you a signing bonus to cover it (after all, the money just goes right back to them). Then when you leave, you get to keep all vested shares with no tax consequence, no need to pony up any cash, and no need to sell right away. Worked out great for me.
This is the way for companies to do right by the first few employees (and have a longer than 90 exercise window when leaving). I know a super early employee who left and had to take a loan to exercise and pay taxes. It's kind of sad to think about it.
> They should be inexpensive; and your employer should be willing to give you a signing bonus to cover it (after all, the money just goes right back to them).
The first part of this can be false. If you're 1/2 way to billions IPO then your options can easily be a year or more of salary to exercise.
About the second part if the company gives you that as a signing bonus you're still on the hook to the IRS for the bonus so now you're 10s of 10000s deep on an illiquid position.
If your company allows for it, you can early exercise and file a 83(b) election so that even as your options vest over time, you only pay taxes for the spread between your strike price and the fair market value at the date of the early exercise, rather than the date of vesting. The taxes can be 0 if you early exercise when the fair market value _is_ the same as your strike price.
It's called election 83(b). For it to work, the company grants you restricted stock instead of options. The restriction is that the company can buy back the stock on a vesting schedule, so it's effectively equivalent to stock-options. The difference is that you can buy all of them on day 1 at fair market value and pay no tax.
It's usually done for early employees who join before multiple rounds of funding occur.
You pay ahead, and if you don't make the cliff, or if you leave after the 1 year cliff but before the full 4 year vest, you get the shares you vested, and a refund of the cash that didn't end up buying the rest.
You need to consider that a very, very small percentage of companies have IPOs.
Many "successful" exits are actually acqui-hires, where a larger company acquires a dead or dying company for its talent. Often the product from that company is immediately shutdown, or at least shelved and no longer actively developed.
Other "successful" exits pay some percentage back to the recent preferred shareholders. Earlier investors are not made whole. Common shareholders generally get nothing.
Founders will still spin these "exits" a positive because they didn't have to shut down. The reality is the venture was a failure. Employees got jobs... that they could've had anyway.
In my 30 year career, I have never had a stock option worth a single penny. When I have someone talk up options as part of a compensation package, I tell them that options are nice, but my experience is that they have had no value in my past and that's the value that I'll assign them in the present and the future.
This seems unlikely.
Exits and IPOs have much greater valuations now than they did ‘back in the day’ so far more early employees end up with a significant infusion of cash.