Tax liability when exercising share options?

gelato_cat

Hi folks.  I was offered some share options by my employer, which is a private company registered in the USA.

I am trying to figure out if I would be liable for tax (and how the tax would be calculated) if I exercised these options and bought the shares.  Eg are they a taxable benefit?

The only way for me to buy the shares would be to pay for them out of my own savings, if that makes a difference.

xylophone

I wonder does this help?

http://www.employeeshareschemes.co.uk/plans-international.aspx

ChilliBob

Your scheme should have all the documentation. The US perspective may change things, but I think most UK schemes are intended that tax is dealt with when buying in, but that you have to pay tax on dividends when holding the shares, and capital gains when exiting. Do read the documentation carefully though and if its large sums having a professional look through and explain it back to you could be useful

Lomcevak

I work for US private company (director of engineering) and agree that the scheme documentation is critical, there are a number of ways to do this.

In my case, my options pay out and are taxed as salary - you are paid the difference between the share price and the option price. For us, the option price is effectively zero, so it's in effect the same as selling shares, but that's definitlely not always true and I know of people elsewhere who have had to raise $100k+ when options vest. For a private company, the valuation is complex as the shares aren't publicly traded. In my case the scheme bases it off the agreed valuation at a 'liquidity event' which gives a price point, e.g. a Series A or B. My options don't trigger without a liquidity event or IPO.

That's one way of doing things, there are several others, but the one I'd be particularly careful on is understanding how you sell shares if the company isn't publicly traded - companies can provide some ways to manage this, particularly in cases where a lot of your total compensation is equity-based (e.g. US startups).

Lomcevak

While I'm thinking about it, one thing to be careful of in a US private company is single trigger vesting - it is less common now, but there are some circumstances where options trigger and become taxable before a liquid market exists. So you get the tax bill but not the ability to sell shares to pay tax.

If this might be you, it's really important that you understand single trigger and double trigger vesting. And be really, really sure before signing up to single trigger.

I'm assuming you definitely mean options here (sounds like you do) rather than RSUs? It it an early-stage company? Generally RSUs are preferable late-stage, pre-IPO

gelato_cat

Lomcevak said:

While I'm thinking about it, one thing to be careful of in a US private company is single trigger vesting - it is less common now, but there are some circumstances where options trigger and become taxable before a liquid market exists. So you get the tax bill but not the ability to sell shares to pay tax.

If this might be you, it's really important that you understand single trigger and double trigger vesting. And be really, really sure before signing up to single trigger.

I'm assuming you definitely mean options here (sounds like you do) rather than RSUs? It it an early-stage company? Generally RSUs are preferable late-stage, pre-IPO

Definitely options, yes.  I'll check the documentation to see if it says anything about triggers.  Thanks!