Let’s say you are an early employee at a Unicorn startup and you were given 0.5 percent of the company when you started five years ago. At this time the company was valued at $50 million, then your ownership position would have been valued at $250,000 ($50 million x 0.05%). Fast forward and the company is now valued at $10 billion. Now your ownership stake is worth $50 million. Whoa….we are paper rich yall! Holla! That is a paper gain of $49,750,000.
But there is bad news if you would like to leave. Of course there is. Mo money mo problems. So if you decide to leave you will face a short-term gains tax of 40 percent, $19.9 million, plus the $250,000 needed to exercise the options. You would have only 90 days to come up with the $250,000 and then the remaining tax would be due by the next tax deadline of April 15.
Some companies like Pinterest and Quora tried to ease the burnden by giving them years to exercise. However the truth is that many companies with these employee dilemmas choose not to do anything about it, because they believe “locking people in” is good for business. Any stock that is not exercised can be returned to the option pool and granted to other employees.