Equitybee is partnering with UI Charitable, a Donor-Advised Fund sponsor built for the way startup employees and founders actually hold wealth. The two companies solve different ends of the same problem. Equitybee helps you unlock the value of startup equity. UI Charitable helps you give from illiquid and private assets. This post is about the second one, and why it matters most in the year your equity pays off.
Congratulations! You’ve just started a new startup job. Employee stock options may be a big part of the compensation you were offered.
These options may one day help you pay off your student loans, buy a house, go on an amazing vacation or even retire early. But before you start dreaming about all these possibilities, it’s a good idea to understand the terms of your options, so you know how and when to exercise them when the time is right.
Your grant letter (or “Options Agreement”) has all the information you need, but the grant letter can be hard to make sense of because of all its fancy finance-y terms. Well, that’s exactly what we’re here for.
In this post, we’ll take a closer look at the grant letter and simplify the terms.
Here are the main things to look at in your grant letter:
The strike price is the price at which the options can be exercised (or purchased – turning them from options into actual shares).
This price is important because it gives you an idea of your total cost when exercising options in the future.
For example, if your strike price is $1 and you have a package of 50,000 options, the pre-tax cost to exercise your options will be $50,000. Keep in mind though, that to calculate your full exercise cost, you’ll first need to understand your tax cost. The information you’ll need in order to calculate your taxes when you decide to exercise:
The entire reason that startups (and other companies) give employees stock options is as an incentive to motivate and retain them. This is where the vesting mechanism comes in. Your options typically will vest over time, meaning the longer you are with your company the more vested options you will have.
In your grant letter, you’ll see what your vesting period or schedule is (usually, this would be several years). At the end of the vesting period, you will have vested in the full number of stock options. However, if you leave before the vesting period is over, that means you forfeit some of the options and will not be eligible for the full amount. But, you can still exercise any options that have already been vested.
The first part of the vesting period is known as the cliff. This means that you need to pass the cliff to “earn” the first part of your options. Once the first vesting period is over, you’ll receive a large chunk (normally 25%) of your stock options at once.
Let’s take a look at an example:
Suppose you have an annual vesting schedule of 1000 options with 25% of options vested each year after your first year of employment. After you’ve worked for one year, you will earn 25% of your options. To see the remaining vesting schedule, you’ll have to refer to your grant agreement. Typically, you will vest the remaining shares on a monthly basis over the remaining 36 months.
The last thing to find out is if your options are NSO or ISO. The main difference here boils down to how you will be taxed.
Incentive Stock Options (ISO) are subject to Alternative Minimum Tax. The AMT may or may not apply to you, and if it is – it wouldn’t be due until you file your tax return next year.Gains from Non-Qualified Stock Options (NSO) are taxed as ordinary income and are due at the time of exercise. Taxability on both types of options are determined by using the difference between your strike price and the company’s current Fair Market Value.
Are there any tax advantages to exercising NSOs early? It really depends.
We hope we have answered your questions on stock options.
If you want to know more, please feel free to ask us questions by commenting below and read our blog and guides.
Hopefully, you can start dreaming about your new car soon!
What a Donor-Advised Fund actually is
A Donor-Advised Fund is a charitable account held by a sponsoring 501(c)(3), in this case UI Charitable. Once you contribute assets, you no longer legally own them, which is what makes the deduction work. What you keep is advisory privilege. You advise how the funds are invested, when assets are sold, and which charities receive grants over time. The deduction happens in the year you contribute. The giving to actual charities happens on the timeline you advise, with no required distributions in any given year.
Stage two: this is where UI Charitable is different, and where it fits startup employees
Here is the part that matters for the way you specifically hold wealth.
UI Charitable allows you to donate long-term appreciated assets such as public stock, private stock, cryptocurrency, etc. to a Donor-Advised Fund, and receive a tax deduction equal to the fair market value of those assets. Startup employees are exactly the people whose appreciated wealth sits in private and illiquid form. UI Charitable can serve the asset class most of the giving world cannot.
One important boundary
To be clear about what does and does not apply. You cannot donate shares that are covered securities by the Equitybee agreement and received by using Equitybee stock option funding. You can, however, donate other appreciated assets to UI Charitable.
*This is not tax advice. Consult a qualified tax professional regarding your specific financial situation.
Case Study: A startup employee in California
How does it actually work? A side-by-side comparison of a startup employee in California.
This same example would work for any appreciated asset donated in-kind.
Startup employee in California
Salary: $350K • Private share value: $1M • Shares donated to a Donor-Advised Fund: $300K (30%)
Getting started
get started with UI Charitable by visiting https://www.uicharitable.org/equitybee
