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Comment by cespare | Hacker News Reader

"Additionally, since you’re going to exercise those options and immediately sell them, the gain in value will be taxed as ordinary income."

Isn't this the point of pre-exercising options? At least in CA, I've been told that one should always pre-exercise ASAP so that if the options are ever worth anything substantial you've held onto them for at least a year, so it's long-term capital gains.

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The potential downside here is that you have to pay to exercise, which is lost money if the company folds.

As long as the strike is low this makes total sense.

Negotiate additional compensation to pre-exercise?

It should be an easy negotiation - the money just goes back into the company, less the taxes you would have to pay on the additional compensation.

In practice, you need to be a fairly significant employee to drive this kind of abnormal transaction.

Isn't that just a needlessly complicated version of a stock grant, instead of stock options?

What benefit would this have over negotiating for a stock grant instead?

The other commenters pointed out that you would have to buy those options on day one. If you're lucky enough that you're company pays for you to exercise these options than, you will absolutely be able to benefit from long term capital gains. There are two issues, however, my understanding is that the IRS will tax all of your real income the year you exercise these options based on the payment you received to buy those options. So your $50k salary will be taxed as if you made $80k since the company paid you $30k for those options. There might be a workaround using a personal LLC, but I don't know tax rules that well. Also, in practice, I've always seen employees but the options on the day of the acquisition. I worked on the corporate development team at AOL, and this was almost always the case. We actually tried to find ways to help employees, but at the time of the acquisition there's very little you can do.

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