10 Facts About Working at a Startup vs. a Big Company

I’ve spent the last few weeks trying to recruit friends of mine to come work with me at my super early startup.  In doing so I’ve had to educate a lot of my friends on what it’s like to be at a startup, and why you might want to join one.  This blog post is a summary of all that advice.  Oddly enough, I wrote a similar blog post my senior year of college while interning at Redfin.  And since college I joined Cloudera before they were funded and left when the company closed its Series C, or third round of funding.  The advice below mostly comes from my experiences at Redfin and Cloudera.  I’ve also worked at Google and Northrop Grumman.

1) Responsibility, accountability, impact: at a startup it’s unavoidable to have lots of responsibility and accountability. There’s no doubt, too, that being at a startup will put you in a position to make a huge impact.  If you do amazing work the entire company and all of its customers will benefit from it.  And you’ll be loved for it.  You’ll get notes from the CEO and other leaders complimenting you on how awesome your work is.  On the flip side, if you make a big mistake, the whole company pays for it.  But keep in mind that most startup cultures prefer agility and speed to cautiousness.  It’s likely that your mistake won’t actually get you in trouble, as long as you were trying to do the right thing.

2) Risk: working at a startup is riskier.  The startup likely isn’t profitable, and probably only has at most 12-18 months worth of money in the bank (this is called the startup’s runway).  If the company does very well, the CEO will raise more money and extend the runway.  You’ll still have a job and each round you’ll get a salary closer and closer to market rate (more about this later).  If the startup doesn’t do well, you’ll be out of a job when the startup runs out of money.  But you’ll be forewarned if the CEO is transparent — most of them are in earlier stages.  A startup is risky because you’re building something from nothing.  You’re doing something ridiculously hard because you believe in it and want nothing more than to see it succeed.  You’re not failing even when all the odds are against you.  You’re the underdog in many ways.

And by the way, if you’re a good engineer you’ll have zero issue finding another job.  Zero.  Every company in software, big and small, needs more good people.  This trend won’t change for a long, long time, either.

3) Opportunities for generalists: generalists don’t do well at big companies.  Big companies want you to be really, really good at that little thing you spend all your time on.  Not at a startup.  Although specialization is still important at most startups, there are far more opportunities at startups for generalists.  I’m defining generalists as people that have interests in one field or many fields.  For example, if you want to be an engineer and work on the website, the data infrastructure, and the mobile app, you’ll love a startup.  Similarly, if you’re an engineer and want to get your hands dirty in marketing or recruiting or whatever, a startup is also a great place for you to learn and grow.  To be totally clear, I’m not saying specialists don’t do well at startups — they do incredibly well.  Generalists, however, don’t do well at large companies.

4) Ownership and leadership: at a big company you need to wait years and years to become a true leader with big ownership.  Not at a startup.  If you’re awesome you’ll be able to grow and move up in your career far faster.  Mark Zuckerberg would have never been given a CEO role at a big company he started working for after college.  The only way he could find himself at the top of an organization is by starting it, or in the general case by joining a super small team.  Your career will be accelerated in a major way by joining a startup.

5) Transparency: startups usually have far more transparency than big companies.  You’ll know why the CEO decided to raise a new round of funding, or why a VP of marketing was hired, or why the company decided to open a new arm of business, or how the CEO did the recent round of investment.  There will always be information that isn’t shared, though, for example salaries and equity compensation, certain board meeting information, and certain sensitive investor information.  But in general every other decision made about the company will be transparent.  You’ll get to see how the company grows, why certain decisions were made, and how the company reacts to competitors and business plan changes.  All of this will teach you about business and prepare you to do your own startup one day.

6) Company culture: you get to help define it.  A company will be, for the most part, an extension of the founders’ personalities.  But especially in the early stages you’ll have a huge impact on the culture of the company as well.  You’ll be in a position to define company-wide celebratory goals, or traditions that the team rallies behind.  At the end of the day a startup is just a few people in a room.  If you’re one of those people your personality will rub off on everyone else and you’ll help create a company that is as much a part of you as you are of the company.

7) Hiring: you’ll do a lot of interviews, and you’ll be part of the decision to hire or not hire someone.  You’ll interview engineers, marketers, sales people, anyone.  You name the position, and you’ll probably interview any potential candidate.  Even if you’re right out of school you’ll still be asked to interview.  Of course, if you don’t like interviewing, you’ll only need interview potential team mates.  Read: if you’re an engineer you’ll only interview other potential engineers.

8) Financial incentive: in general your salary will be lower than at a big company, but your equity, or ownership in the company, will be significantly bigger.  Depending on the stage of the company you join, you’ll be granted anywhere from a few percentage points to a micro fraction of a point.  If the company is bigger, you’ll get fewer shares and your salary will be more inline with the market rate.  If the company is smaller, your salary will be smaller and your equity will be far greater.  Equity has a long, long tail, meaning the first 5-10 employees get significantly more equity than all other employees that follow, with certain exceptions for executives.  This is especially true for the first and second hires, though.

A little more about stock: if you join a company that is already doing incredibly well, you probably won’t get enough stock to retire unless the company turns into the next Facebook or Google.  In most cases, you’ll only get retirement money if you’re one of the first five employees.  Otherwise you’ll get a large down payment on a nice house, assuming the startup does well of course :).  Let me say that all again: except in very rare occasions like Facebook or Google, you can’t expect to join a company that is already killing it and hope that you’ll retire on the money your equity brings.

9) Politics: I’ve never heard of a company with more than 50 people that didn’t have politics.  Politics are a necessary evil whenever a company reaches a certain size.  The point of no return is when the first middle manager is hired — or when the first job opens up that is about controlling people and nothing more.  Small startups can have politics, too, but in the early days there’s generally too much camaraderie and too much daily work to worry about power or any other bullshit like that.  Oh yeah, and while I’m here, unless the leaders of a startup are lame, there won’t be any bullshit.  Everything is pragmatic at a startup, or at least should be.

10) Be a part of something bigger than you: at a startup you’re a part of something much bigger than just what your job asks of you.  Sure, you need to write code, publish blog posts, whatever, but you’re doing much more than that.  You’re building a company.  It’s hard to describe what that feeling is like, though.  Being a part of a small company is somewhat like creating a community or finding new best friends.  You’re making something from nothing, with people who are in it for the same reasons you are.  You’re at the apex of what might become something big, something meaningful and different.  And the excitement is amazingly powerful.

Leaders: Inspire Confidence

I was first introduced to the phrase “inspire confidence” a long time ago.  I didn’t really know what the term meant until I went through a period where I lacked confidence in myself.  A leader needs to inspire confidence, because confident people are better employees in every single way.

When we’re confident we’re not scared to express ourselves — we don’t feel an urge to dampen our abilities by looking for approval elsewhere.  We’re not scared to publish a blog post or send an email without a review first.  We’re not scared to refactor a shit load of code.  We’re not scared to take a meeting with a big customer, or try a new, bold way of marketing something.  Confidence, in addition to enabling more happiness, sets us up to do beautiful, innovative things.

I can’t help but think of Burning Man when I think of confidence.  As I’ve said before, Burning Man is in part about radical self expression.  That self expression comes out because people don’t have social pressure that would otherwise impact their confidence.  There is no social norm at Burning Man, and hence all someone can be is their self.  The result is beautiful, innovative, and clever art.

If you’re in a position of influence, do your best to inspire confidence among your team.  The entire team will be happier, more innovative, and ultimately better employees.  And they’ll like you more for it, too.

This TED talk is somewhat relevant to inspiring confidence.  It talks about inspiring happiness and positivity, which goes very much along with inspiring confidence.

Keep Going

This startup thing is an emotional roller coaster.  Some weeks are amazingly positive, with tons of product progress and great meetings.  And others are slower, with technical problems that won’t get better.  I wanted to share some inspirational thoughts I’ve had lately, in hopes that they’ll be useful to you, too.

Problems aren’t worth solving if they’re not challenging.  A startup that isn’t difficult to build will have lots of competitors, or won’t tackle big enough problems to change the world.  I’m in this to change the world, so for better or worse I’m tackling very challenging problems.

During those challenges, though, it’s so easy to doubt yourself.  To think you’re not capable of doing it.  To think you’re not good enough, or don’t have the right experience or skills to carry on, or that you’ll screw it up anyway.  Bull shit.  You can do anything you put your mind to.  You just need to keep going.  Never stop.  And don’t let anything, especially yourself, stop you.

The most challenging things we do are what make us who we are. They bring out our nervousness and negative emotions, such as self doubt, and tune us into who we are and who we will become.  They make us stronger, more durable, and they open our hearts to those who are suffering and in difficult times, too.

I expect most of you have at least one challenge going on right now.  Maybe you’re unsure about your ability to write good code.  Or maybe you’re scared you’re pursuing the wrong major.  Or maybe you’re moving to a new city without a job lined up.  Times are hard.  But it’s these times that we’ll look back at when we’re older and be proud of.

And be proud right now.  Be proud for having the courage to be where you are right now, to be facing the challenge in the first place.  You’ve already overcome so much.  Just keep going, damnit.  Keep going until you’re sitting on top of the mountain you just moved, looking down at how you’ve made (or will make) an impact in the world.  Because you will if you haven’t already.  You just have to keep going.

The Transition, Or How To Be A Good Leader

A passion in software usually starts with a job at the bottom of an organization, slaving over lines or code or mocks in Photoshop. Yet many of us long for moving up in an organization — we want to be leaders. We’re hungry for more responsibility. We want to make an impact. There will come a time when many of us at the bottom move up to the top. I’ll call this the transition. And success is gated by letting go.

Most leaders tell people what to do. They believe they’re right (smart leaders often are) and expect others to listen to them and follow their every command. I think I speak for everyone when I say that working for a micromanager is terrible. There’s basically nothing fun about it at all.  Working for a micromanager forces you to not think, to not do my best work, to not be excited about working, and to ultimately be unhappy with your job.  I’ve never met anyone that actually enjoyed working for a micromanager.

I don’t blame smart leaders for micromanaging. They’re in a leadership role because they’re smart. They probably know the right answers, which they then dictate to the rest of the team.  What I’ve explained is a completely natural tendency, which is why so many leaders are micromanagers.

Micromanaging makes a team only as smart as the leaders, and no more. Actually, it makes the team less smart than the leader. We all think differently, and when we’re forced to think like someone else we’re worse. Furthermore, micromanaging makes people unhappy because their responsibility and impact potential is completely removed from their job.

When someone smart makes the transition, they need to let go of their belief that they’re always right and challenge their team to do their best thinking. If a leader thinks they have all the answers and hopes for everyone to do as they’re told, people will be unhappy and far less productive. Let go of your intelligence and give your team the opportunity to be smart, to try things, to fail.  People do their best work when they’re given an opportunity to fail.

Letting go is no easy task. You think you’re smart and you’re probably right. But if you want to be a leader for the long run, where your employees are challenged everyday and absolutely happy because of it, you need to let go and pass the responsibility onto others. You need to build on debates with “yes, and” responses instead of “no, but” responses. And you need to trust your team.

The transition isn’t easy. But think back to the times when you were unhappy with your boss, where you wanted to be more responsible and impacting. Remember how you felt. And treat your employees how you wish you were treated then. If you fail at this your team will only be as smart as you (or probably less smart) and they won’t be excited to come to work every day.

An Ode to Entrepreneurs

In light of Steve Jobs, I want us to remember why we’re here today. Steve took a risk to start Apple, NeXT, and Pixar. Yet the risk and all the odds against him didn’t prevent him from achieving what was true in his heart.

During times of stress, worry, and fear, let us remember that we’re here because we’re following our hearts. Somehow it knows the way forward. We need to trust it, trust ourselves, and success, in whatever form it takes, will come.  We are different than other people because we believe in something bigger than ourselves.  We believe in something no one else truly understands.  And only by listening to our heart, by letting it guide us, can we grace the world with the creative beauty we all are capable of.  Throw away the status quo, the feedback of critics.  None of that matters.

Let us always remember this. Never forget why we’re here, why we’re taking this risk. We believe in something big. And that belief will guide us through hell and back, through endless lines of code, through constant torment from skeptics and competitors, to something beautiful and bigger than all of us.  Never forget this, no matter how dark times get.  Never let your creativity be shunned by anything.

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Update: Fred Wilson has a nice farewell piece which compliments my post.

Remembering Steve Jobs

Steve Jobs passed away today.  He has always been an inspiration, but I could have never guessed how much impact his death would have on me.  I suppose it’s because all of us entrepreneurs dream to be like him.  We hope we can make an impact as drastic as his – that our crazy ideas and vision can one day become a reality and change the world like Apple’s products have done so today.

To remember Steve, I watched his Stanford commencement speech, which I’ve always enjoyed and taken inspiration from.  I suggest watching the video in full if you have the time.  If not, I’ve documented my favorite parts below, which are the principals that sit underneath everything amazing Steve has done for us.

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You can’t connect the dots looking forward.  You can only connect them looking backwards.  You have to trust in something — your gut, life, karma, whatever.  Believing that the dots will connect down the road will give you the confidence to follow your heart even when it leads you off the well known path.

You’ve got to find what you love.  Your work is going to fill a large part of your life.  And the only way to be truly satisfied is to do what you believe is great work.  And the only way to do great work is to love what you do.  If you haven’t found it yet, keep looking.  And don’t settle.  As with all matters of the heart, you’ll know when you find [the right work]. Keep looking.  Don’t settle.

Our time is limited.  So don’t waste it living someone else’s life.  Don’t be trapped by dogma, which is living with the results of other people’s thinking.  Don’t let the noise of others’ opinions drown out your own inner voice.  Most important, have the courage to follow your heart and intuition.  They somehow already know what you truly want to become.  Everything else is secondary.

Stay hungry.  Stay foolish.

The Self-employment Struggle

Being self-employed can be tricky.  In the (nearly) three weeks I’ve been without a boss I’ve had days of huge productivity and days of zero productivity.  For a while I thought working for myself would mean a flexible schedule, with lots of time to do whatever I want.  Indeed if I so desired I could put 60+ miles on the bike every morning, wearing compression tights while I sit at my computer and code for the afternoon and evening.  Or I could travel all over the place, see friends endlessly, and live the good life.

What I’ve described above is the self-employment struggle — no clear deadlines or outside pressure, nothing but self-induced desires and goals.  The urge to stay-cation is huge, yet productivity is critical.  I should be the busiest I’ve ever been in my life right now.  The only way I’ll succeed is by building awesome shit, enabling me to have more meaningful conversations with investors.  I quit my job to give myself the time I need to prototype ideas and speak to investors.  I didn’t quit to get more free time.  Self-employment, at least the kind that will hopefully one day lead to a technology startup, is about working hard, not taking a vacation.

Determination, Success, and the Tour de France

Every year at the beginning of July, France is host to the most legendary race of the year. Over 180 professional cyclists from around the world start a 21-day race that will cover more than 2,200 miles and climb over dozens of mountains.  The Tour de France tests these cyclists both physically and mentally, awarding the holy yellow jersey to the fastest overall rider.  This year’s tour, apart from being the most entertaining tour I’ve ever seen, showed me how dependent success is on determination.  I’ll give a quick recap below.

This year’s Tour de France ended yesterday on the Champs-Élysées, putting a close to the epic race which was determined the day before on the individual time trial.  Amongst the favored winners for this year were Cadel Evans of Australia and Andy Schleck of Luxemburg.

On Thursday, July 21, with four stages to go and Thomas Voeckler wearing yellow, Andy Schleck attacked in the mountains.  He would win the Queen stage that day, and only miss yellow by a few seconds.  The next day, again in the mountains, Andy would perform well and wear the yellow jersey, with a margin of almost a minute on Cadel Evans.

With Andy in yellow, the tour would enter the final determining stage on Saturday, the individual time trial (TT).  This stage is different than all other stages, because riders pedal solo against the clock, without team members to draft.  Cadel needed to make up one minute of time on Andy to win the tour, to be the first ever Australian to wear yellow on the podium in Paris.  All Andy needed to do was maintain his minute lead.  Andy, riding last, had a huge advantage, too, because he knew exactly how his time compared to Cadel.

Cadel would win Saturdays stage, beating Andy’s overall time by 94 seconds.  Cadel out raced Andy on the individual TT by over two minutes.  He rode like a champion.  He rode with determination.  You could see his passion and commitment to win in his face.  He wanted the yellow jersey more than anything.  He left everything on the road that day, determined to win, determined to bury his body and forget everything he’s ever done to focus solely on winning.  Meanwhile, Andy rode with excuses.  You could tell by looking at his face, at his pedal strokes.  Throughout the tour he complained about descents being too technical, ultimately upset that the tour wasn’t being determined in the mountains.  Though I haven’t heard what Andy had to say about Saturday’s individual TT, I could tell what he was thinking by his riding.  He was thinking about how lame the individual TT was, how a tour should never be determined by a TT.  He was making excuses to himself, reminding himself that he trained to his strengths in the mountains, instead of to his weakness on the TT bike.

Determination is all it takes to succeed.  Often we focus on what we’ve done instead of what we need to do.  We can’t make excuses.  Excuses haven’t gotten us to where we are today.  Whether you’re racing on the bike or trying to start your own company, you need to focus everything you have on what’s in front of you, on what you need to do to win.  Forget how you’ve trained or what jobs you’ve had previously — those don’t matter anymore.  All that matters is your determination to do whatever it takes to win.  Cadel is the first Australian to ever win the Tour de France because he was determined to win on Saturday.  Instead of making excuses and distracting himself from his goal, he focussed, performed, and won.  Congratulations, Cadel.  I was originally rooting for Andy, but you deserve the glory that will rest on your shoulders for the rest of your life.

Lastly, I’ll leave you with a wonderful commencement speech from Bill Cosby.  I can’t tell you how much this speech has inspired me. I strongly recommend that you listen to the entire speech. It’s a beautiful story and analysis of you.

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The Balance Of Fueling Innovation

Most entrepreneurs I know strive to read anything and everything about markets and industries, priding themselves on their breadth of knowledge, confident that such breadth will be a form of insight when The Big Idea comes.  Previously I fell into this content-hungry category, subscribing to several busy tech blogs, anxious when I couldn’t read everything in my feed.  However, an essay by Glenn Kelman provoked me to try an experiment.  Several weeks ago I unsubscribed from every tech blog except A VC and stopped checking Twitter regularly.  My experiment goes somewhat against the advice of a fantastic book by Steven Johnson, whose thesis is that ideas start as hunches, and, by connecting with other hunches, grow into a world changing phenomenons like evolution and the internet.

Reading Glenn’s recent post on friendship and solitude, where he talks about the importance of solitude for leadership, I realized that my experiment has worked.  The number of blogs and tweets per day I read has dropped dramatically.  While the number of ideas and hunches I’ve created has increased dramatically.  And I’m significantly more productive each day!

I believe that we need to balance between consuming and thinking.  We need to read about our industry, but we also need to escape our busy lives and think by ourselves.  So I challenge you to turn off Twitter sometimes, close your RSS reader, and fall into a place where your own ideas can dance and move and grow.  I spend most of my evenings eating with friends, sometimes feeling lonely when I have a night to myself.  And I don’t enjoy cycling by myself.  But times of solitude and even loneliness help us think, help us develop our ideas that perhaps one day will change the world.

Incentive Stock Options and Taxes

Having spent two years at Cloudera, starting as the third employee and leaving with the company between 40 and 50 employees, I’ve learned a thing or two about the tax law and how one can optimize the exercise and sale of shares to avoid taxes.

Disclaimer: I Am Not a Tax Expert

I am not a tax expert.  You should consult a tax specialist if you ever need to optimize for the exercising and selling of stock options.  Much of what is covered here was learned in Consider Your Options, which I recommend reading if you ever are granted stock options.

Also, in no way do the example numbers listed below reflect on Cloudera’s stock option grants or fair market value.  The numbers below are completely arbitrary, even numbers to make calculations easy.

Background

Before we start talking about exercising and selling I should cover some terminology and common practices.  Tech startups usually give stock options to their employees in exchange for less salary.  There are two types of stock options: incentive stock options (ISOs) and non-qualified stock options (NSOs).  Most tech startups, especially in the early days, will issue ISOs to their employees.  This post only covers ISOs, not NSOs.

In most startup cases, especially for engineers and business owners, part of an employee’s offer for employment will be a stock options grant.  A grant includes an amount of stock options, a strike price, and a vesting schedule (more below).  A stock option is an option to buy a share of the company, and the strike price is the amount each share costs if you decide to exercise your options and purchase shares.  Earlier grants will have smaller strike prices and more shares than later grants, assuming the company is doing well.  As a company grows and succeeds, risk of employment is lower and valuation is higher, hence less shares and larger strike prices will apply.  It’s possible to get additional grants from the company, perhaps in the event of an additional funding round or in the event of performance compensation.

The fair market value (FMV) of the company is the amount of money each share is worth at a given time.  This number changes every time a company raises a round of funding, and even possibly on anual or semi-anual schedules.  For example, a startup that has seen only one round of funding (series A) might have a FMV of $.15 per share.  Whereas a startup that has seen two rounds of funding (series A and B) might have a FMV of $1.00 per share.  The numbers outlined here for Series A and B companies are completely arbitrary.

Option grants typically include a vesting schedule as well.  A vesting schedule dictates when an employee is allowed to exercise options.  Most vesting schedules are the same across tech startups.  Typically your granted stock options vest over four years.  During the first year none of your stock options will vest.  Then, at your one year anniversary 25% of your granted stock options will be vested and available for exercise.  Then, each month 1/48th of your granted stock options will vest.

Timeline, From Options Grant To Money

Here’s the timeline of events that will likely occur during the time an employee receives a grant and sells a share for cash.

  1. Grant received from employer
  2. Vesting period met (e.g., after one year)
  3. Stock option exercised – employee must pay company # of shares X strike price; employee owns share
  4. Exit — either the employee sells their share on a market (public or private), or an acquiring company converts an employee’s shares to cash or the acquiring company’s shares

Short-term Capital Gains vs. Long-term Capital Gains

The taxes paid when a share is sold, either to a public or private market, depend on the duration and timing of exercise and sale.  Short-term capital gains taxes are taxes paid for shorter term investments, maxing out at 39% (like income tax).  Long-term capital gains taxes are taxes paid on longer term investments, which is currently 15% and rumored to increase to 20%.  One needs to optimize their exercise and sale schedule to try and avoid paying short-term capital gains tax.  In order to avoid paying short-term capital gains on ISOs one needs to hold a stock option for at least a year, exercise, then own the share for at least a year before selling the share for cash.  Notice that at a minimum the described practice will require at least two years between the time of grant and the time of sale for cash.  So let’s say I’m granted 100,000 shares at a strike price of $.10.  If I were to purchase 25,000 shares exactly a year after my grant, I would pay my employer $2,500 (shares X strike price) and be able to sell those shares exactly a year later to avoid short-term capital gains.  If either the exercise happens before a year, or the sale happens before two years (from the grant period), then short-term capital gains will apply.  Note that often companies won’t let employees sell shares for cash unless the company is public.

So again, if you believe your company will do well you should exercise options at least a year after their grant date, and don’t plan to sell those shares for cash for at least an additional year, totaling at least two years of total investment.

Avoiding Alternative Minimum Tax (AMT)

The other trap to avoid when planning an exercise and sale schedule is alternative minimum tax, or AMT.  AMT is wildly confusing and I only understand some of its circumstances.  Think of the AMT as being a way for the federal government to tax you more in certain circumstances.  One such circumstance is in the event of exercising options.  Normal tax law doesn’t apply at all to the exercising of ISOs.  That is, if I exercise options, even if they’re worth a lot of money according to the FMV, I will not pay normal tax.  However, I may need to pay AMT.  AMT is a function of a lot of things (again, it’s insanely confusing), but for this discussion it’s mostly a function of the difference between strike price and FMV.  That is, if you exercise options for $.10 a share and those shares have a $5.00 FMV, it’s likely you will be required to pay AMT depending on the amount of options exercised, your household income, and other factors.  For example, let’s say I exercise 10,000 options at a strike price of $.10 and a FMV of $5.00.  This means I will pay $1,000 to my employer for a quantity of stock worth $50,000.  This difference of $49,000 could force me to be eligible for AMT, depending on my household income and other factors.  What’s so problematic about AMT is that you may need to pay taxes on exercised options without being able to sell your shares, perhaps because your company doesn’t yet allow selling of shares.  So imagine the following example:

  1. Exercise 10,000 options at a strike price of $.10
  2. Pay my employer $1,000
  3. Assume FMV of $5.00 per share, making my options worth $50,000
  4. Assume AMT applies to me
  5. I may need to pay thousands or tens-of-thousands of dollars in AMT taxes due to the $49,000 difference, depending on household income and other factors
  6. The company goes bankrupt and my shares are worth nothing.

The above situation is possible because the FMV is very volatile in startups.  Let’s say the FMV drops from $5.00 to $1.00 the next tax year, I’ve still paid taxes on a $5.00 FMV!  And if the company goes bankrupt I’ll have paid taxes on equity I wasn’t able to sell!  And I’ll have given the company money to exercise my options!  Ouch!  Note that in this case one accumulates AMT credit, which might decrease future AMT amounts.  Again, wildly complicated!

One only needs to optimize for AMT in the event of an increase in FMV.  If your startup sees a large increase in FMV, you should absolutely attempt to exercise your options before the FMV increases, avoiding AMT altogether.  Otherwise you’ll need to be prepared to pay taxes in April, or make the decision to wait to exercise and immediately sell, forcing you to pay short-term capital gains.

Conclusions

ISOs and their tax implications are confusing and tricky.  And playing this game may save you thousands, hundreds of thousands, or even millions of dollars depending on how your startup performs.  I highly recommend reading Consider Your Options and consulting a tax specialist if you get yourself some stock options.  And please let me know if my post is incorrect, or if I’m missing anything.

In other news, I was expecting this post to be nice and short, in contrast to most other essays on this subject.  However, I seem to have failed to make this short and concise.  Pesky task law :).