You have to pay AMT on the difference between your strike price and the current 409a price of common. It doesn't have much to do with where preferred is valued, other than the fact that a high preferred value, means that the updated 409a common might be higher.
So let us say, your strike price is $0.50 and you are fully vested after 4 years. The company recently does a round where preferred is at $3.00 per share and the new 409a is $1.25/share. When you leave this is what will happen
- You need to pay the company $0.50 * number of options you have
- You have to pay AMT on (1.25-0.5) * number of shares
With last year's tax law, one good thing is that AMT rules changed, so AMT might not apply. You should, of course, talk to your accountant/tax professional for the proper advice :-)
That’s exactly what I was trying to say — specifically the 409a valuations for several companies I’ve been at were not appropriately reduced for common shares versus the preferred.
E.g. a company raising $5m Series D at a $30 million valuation, and which already has $10m in preferences. First you have to adjust the valuation because that $5m will be the first dollar out and might even be participating preferred - so they are getting 1/6th of the company for $5m but they are also getting basically a $5m note payable.
If you asked them what they would pay without the preference maybe it’s closer to $15m. Then you also have to adjust for the other outstanding preferences. So the common shares (which are likely to be even further diluted before they become marketable) in that case are presently nearly worthless.
Most people do not adequately consider the impact of preferred share preferences, future dilution, taxes, and marketability. These horseman turn a decision which might seem like at first glance to be, “Why give up the chance to participate in a future equity event?” into something more closely resembling a suckers bet.
> That’s exactly what I was trying to say — specifically the 409a valuations for several companies I’ve been at were not appropriately reduced for common shares versus the preferred.
Anecdata, but I have seen this too.
Can someone knowledgable founder here please chime in on why companies do this? Does the higher common price help the company boost its compensation packages to match those from AmaGoogFaceSoft who give publicly traded stock?
Aside from companies just not generally understanding the value of a low common stock valuation? They could mistakenly believe the low common valuation will impact a future funding round.
The value can creep up over time, and then companies try to avoid the perception that the common stock would ever become less valuable, so they also might try to keep it rising.
Or perhaps more dubiously, they could be quoting stock option grants in terms of dollar value of the strike price, and want it to look higher for the same number of shares. In an offer letter, which seems like a larger/better grant; 10,000 options at a $3.80 exercise price, or 10,000 options at a $0.38 exercise price? You will almost never see a percentage value quoted, and I've heard of some companies claiming the total share count is not even public information!
You have to pay AMT on the difference between your strike price and the current 409a price of common. It doesn't have much to do with where preferred is valued, other than the fact that a high preferred value, means that the updated 409a common might be higher.
So let us say, your strike price is $0.50 and you are fully vested after 4 years. The company recently does a round where preferred is at $3.00 per share and the new 409a is $1.25/share. When you leave this is what will happen - You need to pay the company $0.50 * number of options you have - You have to pay AMT on (1.25-0.5) * number of shares
With last year's tax law, one good thing is that AMT rules changed, so AMT might not apply. You should, of course, talk to your accountant/tax professional for the proper advice :-)