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Comparison of Laddered Exercise and Ten-Year Panic

Number of share options 400,000


Strike price per share $0.01
End of
Year 1 Year 2 Year 3 Year 4 …
Vested 100,000 200,000 300,000 400,000
Unvested 300,000 200,000 100,000 -
FMV at EOY $0.50 $1.00 $2.00 $3.00

Scenario 1 -- Laddered
Exercise 1 100,000
Exercise 2 100,000
Exercise 3 100,000
Exercise 4 100,000
Cost to exercise $ 1,000 $ 1,000 $ 1,000 $ 1,000
Spread = (FMV - exercise) * shares $ 49,000 $ 99,000 $ 199,000 $ 299,000
Tax (@ 49% assumed) $ 24,010 $ 48,510 $ 97,510 $ 146,510
Total cost over 4 years $ 320,540

Scenario 2 -- Ten-Year Panic

Year 10 cost to exercise


Year 10 spread
Tax (@ 49% assumed)
Total cost in year 10

Kellblog by Dave Kellogg is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License

Notes
This differs from the text of the blog in one key way -- the strike price is $0.01 here and it's $0.10 in the blog. My ba
Assumes ISO option, ergo taxed as ordinary income, no AMT cacls -- often not the case in early-stage startups, be su
Assuming 49% tax roughly Calif max (Fed 37% + Calif 12%) on ordinary income/short-term gains and 30% (20% + 10%
Note that while I don't highlight it, you can stop along the way in scenario and have part of your options; only at the
The 83b early exercise is not shown but the math is simple -- if done properly it costs $0 to execute up-front and res
This is not my best spreadsheet (e.g., tax rates are hard-coded), but it does make the point.
Year 10 Sells in Year 10
400,000
-
$10.00

Laddered
Sale price $ 4,000,000
Tax basis $ 650,000
Spread $ 3,350,000
Tax at 30% $ 1,005,000
Keeps $ 2,995,000

Total taxes $ 1,321,540


Avg rate 33%

n-Year Panic
Sale price $ 4,000,000
4,000 Tax basis $ 4,000
$ 3,996,000 Spread $ 3,996,000
$ 1,958,040 Tax @ 49% $ 1,958,040
$ 1,962,040 Keeps $ 2,037,960

Total taxes $ 1,958,040


Avg rate 49%
ercial 4.0 International License.

d it's $0.10 in the blog. My bad.


e in early-stage startups, be sure to understand AMT if you have an ISO option
erm gains and 30% (20% + 10%) on long-term gains
art of your options; only at the end does it get very expensive to exercise
$0 to execute up-front and results in $1,200K of taxes in Year 10 -- a pure 30% tax rate.