> what they did here with the equity, especially the option exercise period, is a nice touch.
But it's not all that great. Patreon is not publicly traded, so it seems likely that exercising any options will require cash up front, plus it will immediately trigger taxable compensation (income tax plus FICA). And how will the FMV be determined, if there is no public market trading? (ans.: usually just some number voted on by the board). It may well be that the options are never worth anything even after the extended period.
It is clear that these are not ISOs (statutory options), because statutory options by law only allow up to 3 months to exercise after employment ends.
To me, this seems a little odd to complain about given that all those factors were true about the equity compensation when people signed on. The company didn't fundamentally do a bait and switch or change the rules.
Layoffs suck but I found the extended exercise windows and other benefits to be rather pleasantly responsible given the situation.
FMV is determined by a 409a valuation, it’s an imprecise thing but it’s done frequently even for private companies and all employees will know the FMV of the shares. Not just a made up number by the board.
They are likely NSOs and with an extended exercise period the former employees do not need to exercise them. They can just hold them and if within 7 years there is a liquidity event, they can exercise & sell. The taxable event would only be upon exercise, so in the case the former employee just holds the options (which is almost certainly what they’ll do), there is no immediate tax impact, nor any sadness about the options expiring. Upon a future E&S they’ll have taxes to pay but also money from the sale to pay the taxes.
Yes the situation could be more complicated if the person were trying to optimize the tax situation but I think that is very unlikely to apply in this situation. Just hold the options and be happy.
And really PopAlongKid, why are you so critical when you really have not even a basic understanding of how this works?
I was neither complaining (previous reply) nor being critical. I was just saying that at best extending the exercise window was pretty neutral, not some nice benefit funded by the company like extra severance pay or extended health insurance. Most of the comments seemed to be vastly over-valuing this particular aspect of the layoffs.
And if Patreon is acquired some day rather than going public, the employee shares are probably going to be last in line after all the VC money (preferred share classes), and maybe not worth anything. I went through this when I worked for a dot-com startup in the early aughts. Even if they do go public, there will probably be lock-up periods to restrict the immediate selling of shares, and then you are at the mercy of the stock market, where the value of the company (which you long ago stopped having any input to) could well put your shares into loss territory.
The shares can’t lose money (in theory) because with the extended exercise period you can simply not exercise them if they are underwater.
It's not a unique benefit, many companies offer the extended exercise window, but it is very good for employees because otherwise they have 90 days to exercise or abandon the options.
In your mind you are imagining somebody with a few options that are barely in the money. What if somebody who got laid off has worked there for 5 years and is sitting on super valuable options. With no extended window they'd be in a huge pickle where they'd either have to abandon all their options or pay a huge exercise/tax bill right now. But with the extended window they don't.
Neither of us can predict the future of patreons valuation so you shouldn't assume things are going to go badly and thus this benefit will not matter. The whole point of stock options is the option part of it. Maybe it will be worth a lot, maybe it won't, but you'd like to wait and find out and shouldn't have to give that up because you were laid off.
>The shares can’t lose money (in theory) because with the extended exercise period you can simply not exercise them if they are underwater.
Incorrect. Yes, one would not exercise options that are already underwater, but once you own the shares and there is a post-IPO lockup period[0] you most definitely can lose money on the shares, money on which you already were taxed at ordinary tax plus FICA rates. Try looking at the volatility of company share prices in the period immediately after their IPO.
>you really have not even a basic understanding of how this works?
You also have not addressed the strong possibility of being acquired rather than going public. (Ex-)employees do not make any money until after all the VC people do, and there may not be much left.
Again, I never said this was a bad thing, more like a "meh" thing.
Exercise and sell is an instant prices. If you choose to exercise and hold obviously you now have the volatility of owning the stock, I'm not talking about that.
Yes preferred share classes exist, this is irrelevant to whether or not the options have option value! I'm not guaranteeing that Patreon stock will be worth a lot of money, only that it might be worth a lot of money.
This is incorrect. You cannot exercise ISOs after 90 days post-employment. What you pay to the company at exercise isn't time dependent: the strike price is fixed at time of grant. What you may be referring to is the AMT, which does fluctuate depending on FMV at time of exercise, but that doesn't affect the 90-day limit.
Yea I wasn't completely clear I the description, not remembering exactly at the moment. Thanks for pointing out. I was referring to the option some employers will offer to convert ISOs to NSOs after 90 days. So yes you're technically not exercising ISOs after 90days. My point more being that there are options with some employers to not completely loose all rights to equity after 90days.
But it's not all that great. Patreon is not publicly traded, so it seems likely that exercising any options will require cash up front, plus it will immediately trigger taxable compensation (income tax plus FICA). And how will the FMV be determined, if there is no public market trading? (ans.: usually just some number voted on by the board). It may well be that the options are never worth anything even after the extended period.
It is clear that these are not ISOs (statutory options), because statutory options by law only allow up to 3 months to exercise after employment ends.