Amid headlines about billion-dollars valuations are many employees who remain trapped unless their employers eventually go public or else sell to an acquirer in a cash deal.
The problem centers on the option plan structure that startups use. Owing to a decades-old tax provision, employees have to exercise their options within 90 days of leaving or else lose them to the company. It’s worse than it sounds. In many cases, employees’ options grow so richly priced that they’re unaffordable. Their other options are stressful, too. Sometimes, departing employees can sell their options to secondary buyers, but not every company will allow that. Some people borrow money to buy their options. That can also prove disastrous, especially in those not-infrequent cases when the options prove to be worth less than the employee has already spent to buy them.
Thankfully, a small but growing number of companies is trying to tackle the issue by giving employees more time to exercise their shares, including Quora, Palantir, Pinterest.
Now, Triplebyte, a young company that was cofounded by former YC partner Harj Taggar and which helps programmers find jobs at Y Combinator companies, is joining the battle against current stock option plan schemes. Specifically, the company has worked with IronClad (a YC-backed automated assistant that manages legal paperwork) and the white-shoe law firm Orrick, to create standardized paperwork that any company can use to give their employees 10 years to exercise their options. (Really. You can download them here.)
Fourteen YC alums, including Coinbase, have already implemented Triplebyte’s extended window option plan, and nine others have pledged to do, Taggar tells us. Perhaps even more meaningfully, Y Combinator has agreed to recommend that its companies use the Triplebyte extended window option plan documents, beginning with YC’s current Winter 2016 batch.
The solution isn’t fool-proof — still. The so-called incentive stock options (ISOs) that employees are given used to be far more attractive before Congress changed the rules roughly a decade ago. Now some employees are subject to an Alternative Minimum Tax (AMT) that they weren’t prior. This means the longer an employee waits to buy his or her options (and they often have to wait for them to vest), the bigger the tax hit.
Also worth noting: 90 days after an employee’s separation from the company, his or her ISOs automatically convert to what are called non-qualified options (NSOs), which wind up resulting in even more taxable income. (Taggar plays down this issue, saying that “you pay more tax on NSOs than ISOs, but it’s not as much as people think.”)
Companies with an existing option plan in place might not be in a rush to alter it, either, particularly given their other priorities, including weathering a market that appears to be turning.
For startups that have yet to create a stock option plan, however, TripleByte has put together a long list of the arguments that founders are likely to hear concerning why extending their startups’ stock options exercise window is a bad idea.
It also created a point-by-point refutation of each argument. Read and enjoy. (We did.)