Hello folks,
My company, a private late-stage scaleup company, is issuing me stock options regularly.
I’m now wondering if and when I should exercise them, with the balance being between risk and taxation mostly.
My understanding is that I will pay income tax on exercise based on current Fair Market Value (FMV) - strike price. With FMV being currently some obscure formula based on a lot of parameters validated by the tax authority since the company is private, and will switch to market price once (if!) the company goes public.
So if you assume the FMV will generally increase over time, then the earlier you exercise, the fewer income taxes you pay since the difference will be smaller. If you wait until the company is public and you can sell immediately after exercise, then your whole gain is taxed as income, which makes sense. If you take risk and hold, this is capital gains and not taxed.
Wealth valuation once exercised is apparently something like a 1/100th-1/1000th of the strike price, so negligible.
Regarding risk: the company has sizeable revenues, has been continuously growing at 20+% for the past few years, and is now cash-flow positive. I believe the product is solid and the market position strong, with decent vision for the future and potential for increased margins.
Of course there’s a risk it all comes crashing down, but based on comments made by the CEO, I estimate there’s a good chance the company IPO in ~3 to 5 years, and I see myself staying there.
All things considered, I’m bullish on the company and willing to take risks.
But now where I am stuck is: is the risk worth it?
I’m looking at, best case, locking 10k+ for years plus paying maybe 1k in extra taxes on exercise.
If in 5y the stock price is maybe 20% higher than now, then it definitely doesn’t feel worth it just to save a few hundred in taxes. If we’re talking about triple or quadruple digits growth in stock prices, then it’s a different story.
I guess my questions are:
- how does FMV differ when the company is private vs public? Should I expect a discontinuity on IPO? For instance, for a public company I would expect the 20% yoy growth to be priced in, so you can’t just say 20% over 5 years is about x2, so I can expect stock price to roughly x2. But currently private FMV seems more like an accounting tool, so maybe growth is not priced in entirely?
- I have honestly no clue what to expect even in case the best happen. I have access to revenues, cap size, number of shares, maybe some other stuff. If we take assumptions like 20% yoy growth, is there even a way to estimate the order of magnitude potential gains at IPO?
Thanks.