Tax Treatment of Start-Up Stock Options

I

interested21

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My OH's employer is a multinational startup that is high-growth and will hopefully IPO in the next 2 years. She has been granted stock options which will begin to start vesting soon, so we're trying to understand what the tax implications would be if she was to exercise these options. Here's the scenario:

January '21 - Granted 25000 units, vesting over 4 years. Exercise Price is €1 each
Summer '21 - New funding round means that company's valuations grow. Fair Market Value is now €3.5 (additionally, their equity tool lists the "share price" as now being €10)
January '22 - first traunch of the 25000 units vest (6250 units), allowing her to exercise the options

Here's my understanding of the situation:
  • When she exercises her options in January, she will need to pay income tax at the marginal rate on (Number Of Units * Exercise Price), ie. 6250*€1. Or is it the new Fair Market Value she pays the tax on?
  • When she sells post-IPO, she will pay CGT on the difference between FMV and the share price on the day of sale

Here's my questions
  • Is the above understanding correct?
  • Why would the "share price" listed on their internal tool be triple the Fair Market Value? What is the difference between these two terms
  • Anything else I might be missing?
 
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No. The company should be able to provide expert guidance on this or point you at their advisor who can.

Income tax is due on the discount between the exercise price paid by your OH and the "true value" at date of exercise. The option to buy below fair market value gives her extra income, which is what's taxable (the value to your OH is the same as if they'd just increased her salary by the difference). So in your example, (€3.50-€1) = €2.50 discount *6250 units. CGT is then due on any subsequent gains between "true value" (e.g. €3.50) on exercise date and actual value at subsequent sale. If you sell on same day as exercise, only income tax is due, since there is no taxable gain.

As the company is private , it may be difficult to sell a small tranch of shares on the secondary market. That might explain the difference between the valuation price offered to new investors and the fair market price if you tried to sell a small tranche.

Good luck for a successful IPO; it's sure to be an interesting one if it's the company I'm thinking of.
 
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MugsGame said:
No. The company should be able to provide expert guidance on this or point you at their advisor who can.

Income tax is due on the discount between the exercise price paid by your OH and the "true value" at date of exercise. The option to buy below fair market value gives her extra income, which is what's taxable (the value to your OH is the same as if they'd just increased her salary by the difference). So in your example, (€3.50-€1) = €2.50 discount *6250 units. CGT is then due on any subsequent gains between "true value" (e.g. €3.50) on exercise date and actual value at subsequent sale. If you sell on same day as exercise, only income tax is due, since there is no taxable gain.

As the company is private , it may be difficult to sell a small tranch of shares on the secondary market. That might explain the difference between the valuation price offered to new investors and the fair market price if you tried to sell a small tranche.

Good luck for a successful IPO; it's sure to be an interesting one if it's the company I'm thinking of.
Click to expand...
Unfortunately they haven't been very good at advising on this at all!

Thanks for this though, that makes a lot of sense!
 
If she was granted additional options at the current fair market value, does this mean that she doesn't have to pay anything to exercise these options?
 
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