As this piece points out, legally, you might be able to frame things this way and maybe this is the custom and practice in private equity deals (it can even make sense in an individually-negotiated deal with a senior executive who knowingly accepted the risks involved). It is merely the illusion of ownership - an ownership that comes with all the risks of buying stock (the cost, the tax risk, the economic risk) and none of its benefits. This is what they call "heads I win, tails you lose." The company succeeds: it has the option to rob you of your equity value by getting it all back at a strike-price cost that is a tiny fraction of its now vastly appreciated market value. The company fails or plods along uneventfully: it has no obligation to buy back anything from you you took the risk and lost. After you pay for the stock, and any associated taxes, you hold common shares that stand in the back of the line on any liquidity event, meaning that you might get nothing even in a liquidity event should the proceeds not exceed the value of the liquidation preferences held by preferred stockholders or should the acquisition be structured in a way that primarily rewards those who get bonus/retention packages with the acquirer and leaves others with essentially nothing.Īs if this all were not risk enough, Skype now comes along with a vehicle by which you lose the value even of that illiquid stock you thought you had bought - and paid for, and paid tax on, and whose value you ran the risk of losing in case the company went nowhere - at the very time when the wild success case strikes. If you have ISOs, you may avoid ordinary income tax but may easily get hit with AMT. If the paper value of the stock is high, owing to recent funding rounds, you will have to pay ordinary income tax on the spread between your exercise price and the then fair market value.
You have to pay real money to get illiquid stock in a company that might easily fail. You have to earn them out over time before they might have any value at all. Options can be tricky enough for employees to handle even in standard startup scenarios (see recent thread here: ).
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