I don't think this is a new thing (though doing them quarterly probably is) - we called them "internal liquidity events" where I used to work pre-IPO. They provide some liquidity to employees (probably at a price worse than what you'd get after going public since private valuations are mostly bullshit, and these events are only really viable with investors willing to be on the other side of the trade). They can also help with companies private for decades if employee options are approaching 10yr expiration.
They're okay - still imo it's better to be public for employee liquidity in order to get accurate pricing.
Though if I was a founder I'd see the draw of doing it this way, running a public company is a much larger pain than remaining private while still providing some internal liquidity to employees.
Related, the current tax of the strike -> FMV spread on exercise above AMT for ISOs hurts employees and I don't understand the USG rationale for this. If you could exercise tax free it'd make things way simpler for employees and they'd just pay tax on future sale. Still a risk, but not nearly as bad in most cases. It also makes it easier to save up, exercise and hold for long term cap gains.
A lot of people end up forced to participate in these liquidity events (at best - if they're not available there are companies that will front your exercise cost for an extortionate cut) when they otherwise wouldn't because they're approaching expiration and can't afford to pay both the strike and the tax cost on this "income" - when a lot of the time you can't even sell the shares.
I don't know why you'd put income in quotes. It's things you are being paid for your work. If you want to avoid the tax later, exercise the options as soon as they're available and assume the risk.
It's in quotes because you often can't liquidate the exercised shares of a private company.
So acting as if the spread is income prior to an actual sale for tax reasons is wrong (imo) and bad policy.
You're still assuming risk when exercising options even when there's a spread, that risk is only eliminated when you sell them (which is when you should get taxed).
We don't tax people on unrealized gains, why do we tax people on unrealized gains when exercising options? A reason might exist, but I haven't heard one that's made sense.
Comments
I don't think this is a new thing (though doing them quarterly probably is) - we called them "internal liquidity events" where I used to work pre-IPO. They provide some liquidity to employees (probably at a price worse than what you'd get after going public since private valuations are mostly bullshit, and these events are only really viable with investors willing to be on the other side of the trade). They can also help with companies private for decades if employee options are approaching 10yr expiration.
They're okay - still imo it's better to be public for employee liquidity in order to get accurate pricing.
Though if I was a founder I'd see the draw of doing it this way, running a public company is a much larger pain than remaining private while still providing some internal liquidity to employees.
Related, the current tax of the strike -> FMV spread on exercise above AMT for ISOs hurts employees and I don't understand the USG rationale for this. If you could exercise tax free it'd make things way simpler for employees and they'd just pay tax on future sale. Still a risk, but not nearly as bad in most cases. It also makes it easier to save up, exercise and hold for long term cap gains.
A lot of people end up forced to participate in these liquidity events (at best - if they're not available there are companies that will front your exercise cost for an extortionate cut) when they otherwise wouldn't because they're approaching expiration and can't afford to pay both the strike and the tax cost on this "income" - when a lot of the time you can't even sell the shares.
I don't know why you'd put income in quotes. It's things you are being paid for your work. If you want to avoid the tax later, exercise the options as soon as they're available and assume the risk.
It's in quotes because you often can't liquidate the exercised shares of a private company.
So acting as if the spread is income prior to an actual sale for tax reasons is wrong (imo) and bad policy.
You're still assuming risk when exercising options even when there's a spread, that risk is only eliminated when you sell them (which is when you should get taxed).
We don't tax people on unrealized gains, why do we tax people on unrealized gains when exercising options? A reason might exist, but I haven't heard one that's made sense.
Anyone would argue though that private valuations >>> public valuation. Ex Instacart private valuation ~ Doordash public market fap
The usual pattern seems to be: 409a valuations (private) < public valuations < private fundraising valuations