Don't know whether to exercise ESOP shares or not - high tax bill?

S

SClarke

Registered User
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I started the process to exercise my shares with previous employer a few months ago when I left the company. Since then tax rules have changed and they said instead of me arranging tax, that I need to pay them.

I don't have a lot of shares as I was only with the company 2 years. 160 shares, market value at €5.99 per share, subscription price €1. The tax to be paid is approx €500, which seems like a lot.

I'm trying to figure out if it's worth the cost and hassle at this point to go through with exercising them and paying the tax fee, as I'm thinking the return if any is going to be low, likely the company will be bought out eventually.

Any documentation i've got from them on the scheme is fairly unclear and finding it hard to get any info on ESOP schemes in general.

However, I do have this info (changed wording so not lifted directly) :

In the event that the Company is a party to a merger, asset sale or share sale, takeover or other reorganisation (each an "Exit Event"), the Board will be entitled to take a number of
actions including:
(i) to cancel unvested Options;
(ii) to require you to exercise all vested options on such conditions as may be determined by
the Board and in circumstances where Options shall lapse if not so exercised;
(iii) to substitute your Options for options of equivalent value in the surviving entity;
(iv) to pay you the cash difference between the subscription price applicable to your Options
and the amount payable per Share under the terms of the Exit Event; and
(v) to accelerate or vary the vesting and exercisability of your Options.

So, has anybody gone through something similar with their company's ESOP? Should I continue to pursue or will it be worth it with the amount I have?

Not sure if the clauses above for the sale of the company are loose either and leave it petty open for the company to do what they wish - or are these standard?

Any nuggets of advice or knowledge, much appreciated. Fairly lost with this, thank all!
 
Also, if you had a spare grand to invest in shares today would you buy shares in your employer's company while also depending on them for your overall remuneration? If not, then that's another argument for liquidating them.
 
ClubMan said:
Also, if you had a spare grand to invest in shares today would you buy shares in your employer's company while also depending on them for your overall remuneration? If not, then that's another argument for liquidating them.
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Well the OP doesn’t work there anymore, but it’s a valid point more generally.
 
Brendan Burgess said:
So you are getting €960 worth of shares
for €160
Or a profit of €800

It's still a net of €300 after the tax.

I would just cash them.
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The opening post quotes scenarios that could happen in an "Exit Event". That would suggest this is a private company and therefore the stock not liquid. So "cashing them in" isn't an option

SClarke said:
Not sure if the clauses above for the sale of the company are loose either and leave it petty open for the company to do what they wish - or are these standard?
Click to expand...

They are pretty loose. The standard I've seen from private VC-backed US companies is that you have a period of time after you leave to exercise your vested options (often 30 days but sometimes longer), after which they are gone. Yours are much looser, but many of the scenarios are much more beneficial to you than a tight "we're cancelling your options after 30 days". But of course there's a lot of uncertainty for you about what would happen in the event of an exit.

Buying shares of private companies is high risk. The probability of your shares being worth near-nothing is high (either through business struggles or a bad pref stack in an acquisition). So you need to decide if the potential upside (which is uncertain in quantity and likely far away in timing) is worth the risk and illiquidity. What else would you do with this money? Would you get a better risk-adjusted return buying an ETF (and better liquidity).
 
Thanks for the advice above, much appreciated and for clarifying those few points. As @interested21 has noted this is for a private company (not public) so it would be the purchasing of vested stock options.

They are a tech company with VC funding for transparency. The cost (of tax) isn't significant to me (I have to spare so thats not a problem) but considering the likelihood of them going public is pretty slim, and an acquisition or possibly a merger is more likely, I'm uncertain as to whether purchasing is a pointless endeavour with the volume of shares. As @interested21 has noted, and if I understand correctly, with an exit event, i'd probably be at nothing or at a loss?


Also was basically trying to gauge if any others have been in this position and what route you took? Cheers for the advice so far, very helpful!
 
SClarke said:
Also was basically trying to gauge if any others have been in this position and what route you took? Cheers for the advice so far, very helpful!
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I think it depends entirely on the company, so I'll give two examples where I am and am not exercising options.

My wife and I both work for VC-backed private US companies. She joined her company in 2020 and was granted options at a strike price of $1. The following year, the company (like everyone else in 2021) had a bumper fundraising round and the Fair Market Value went to $4 a share. For her to exercise those options now, it would cost the $1 strike price, plus ~$1.50 in tax, so $2.50 in total. In theory, that's still a ~35% discount, but the discount is against a 2021 valuation that has little basis in reality. With their revenue and growth, there is simply no way that the public market would value this company at $4 a share today. An acquirer might, but then the pref stack comes into play and that discount could easily be wiped out. All in all, the risk-adjusted return seems really poor to me and we would probably be better off investing that money in an ETF.

I also work for a VC-backed private US company. We are Series A and growing like a weed from a low starting point. Our valuation hasn't had to be updated since I joined, so exercising my options currently only costs me my strike price, no tax. It is a young growing company, and there is a clear path to it being worth >10x its current valuation over the >10 years it will take to reach liquidity. So I will be exercising my options now, while they're cheap, before the valuation goes up and I'll start having to add a tax bill onto the price of exercise. I'll probably stop exercising when the tax is greater than the strike price.

I hope that helps give an example of how I'm thinking about these things. From what you've said, you'd probably get a better return from investing that money in the public stock market
 
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