This is my major rub with ISO's. Their sentence sums up the problem perfectly: "You’ll still be able to buy it for $1 (and then sell it immediately for a profit of $19)."
How am I supposed to sell a stock immediately if I have no market to sell it on because the company is private?
In my opinion, ISO's drastically favor the employer. If I am unhappy and wish to leave, but have vested two years of options, I am forced to either a) throw them away after 30 days or b) purchase them and take on a potentially enormous tax burden unless I do actually have the ability to sell them immediately.
Additionally, by waiting to exercise at a later date I further push back the amount of time it takes to qualify for long term capital gains when selling the remaining portion of the stock.
I was in the exact situation I describe about three years ago when I was very unhappy and wished to look for something new. I had vested an extremely generous ISO grant that, should I have exercised it, would have bankrupted me from the tax bill. My stock was worth 100x what my strike price was, so in essence, I was the "victim" of the company being extremely successful. My way out of this problem was simply luck: we got bought four months after this personal crisis started.
I also found myself feeling like a second class citizen as time wore on. I had been a first employee and helped build the company into what it was, and I felt involved and informed with most everything going on. As time wore on, we became successful and grew substantially and I found myself in a situation where I was becoming simply a senior member of the engineering team. I was certainly not an owner, despite what my time, acceptance of risk, and vested options would imply after four years of hard work.
If companies really believed in the value of an ISO they would put their money where their mouth is and have a stock purchase program that helps alleviate the tax burden over time. It's that, or allow option holders to keep their options for many years after employment terminates. As an owner, what do you want -- option holders that happily stick around even when they could leave or employees who feel they are forced to stay regardless of what happens?
A recent trend (that employees should push for) are yearly (or more often) buyback events, where the current major investors and new Series X investors offer to liquidate current/former employee positions.
Agreed. It's an act of good faith that brings the owner/option holder arrangement more into balance as a company's situation changes. In general I am in favor of any action that attempts to accomplish this.
How am I supposed to sell a stock immediately if I have no market to sell it on because the company is private?
In my opinion, ISO's drastically favor the employer. If I am unhappy and wish to leave, but have vested two years of options, I am forced to either a) throw them away after 30 days or b) purchase them and take on a potentially enormous tax burden unless I do actually have the ability to sell them immediately.
Additionally, by waiting to exercise at a later date I further push back the amount of time it takes to qualify for long term capital gains when selling the remaining portion of the stock.
I was in the exact situation I describe about three years ago when I was very unhappy and wished to look for something new. I had vested an extremely generous ISO grant that, should I have exercised it, would have bankrupted me from the tax bill. My stock was worth 100x what my strike price was, so in essence, I was the "victim" of the company being extremely successful. My way out of this problem was simply luck: we got bought four months after this personal crisis started.
I also found myself feeling like a second class citizen as time wore on. I had been a first employee and helped build the company into what it was, and I felt involved and informed with most everything going on. As time wore on, we became successful and grew substantially and I found myself in a situation where I was becoming simply a senior member of the engineering team. I was certainly not an owner, despite what my time, acceptance of risk, and vested options would imply after four years of hard work.
If companies really believed in the value of an ISO they would put their money where their mouth is and have a stock purchase program that helps alleviate the tax burden over time. It's that, or allow option holders to keep their options for many years after employment terminates. As an owner, what do you want -- option holders that happily stick around even when they could leave or employees who feel they are forced to stay regardless of what happens?