Owners of California startup companies might want to look to provide stock options to their employees on a broader basis. This is because it may be possible to delay the tax consequences that come with having them if such options are offered to at least 80 percent of employees. In most cases, employee stock options need to be exercised within 10 years if their recipients stay with the company.
However, they may need to be exercised sooner if a person chooses to leave the company. Typically, they must be exercised within three months of exiting the startup. As employee stock options are taxed as ordinary income, it could mean hundreds of thousands of dollars paid to the government. However, if the company is still private at that time, it may not be possible to sell the shares to get the cash needed to pay the tax bill.
Today, it takes an average of 11 years before a company goes public. Assuming that the 80 percent threshold is met, most who work for startups and receive stock options could defer taxes owed for up to five years under the tax legislation enacted in December 2017. High earners and executives may not qualify for the deferral. For some employees, the value of stock options is up to 10 times higher than their actual salaries.
Start-up companies can be effective in helping owners to capitalize on business ideas on their own terms. However, there are tax and other regulatory considerations that may need to be made prior to forming a new entity. An attorney may be helpful in assisting startup founders structure businesses to account for those variables.