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compound

@Compound

Sep 22

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If you joined Figma in ~2018, received 250k stock options, and exercised them all, your net outcome today would be $8.16m But if you waited until the acquisition to exercise, you’d take home $7.50m – a difference of $657,822 Let’s break it down:

Let’s say you joined Figma as a mid-level engineer in 2018 You might have been offered 250k incentive stock options (ISOs) vesting over 4 years with a 1-year cliff Let’s also assume that Figma let their employees early exercise

(Note: early exercise is when you exercise your options before they vest This has the advantage of being able to exercise when the 409A valuation is lower, usually resulting in lower taxes While most startups don’t offer early exercise, we’ll imagine that it’s available here)

Back in 2018, these options probably had a strike price of ~$0.33 To exercise all 250k, you could spend $83,000 Certainly not a small amount of money, but if you had several years of engineering experience, something you could consider twitter.com/RolfeWinkler/s…

Rolfe Winkler

@RolfeWinkler

Sep 15View on Twitter

What investors first paid for @Figma, which @Adobe buying for ~$40.20 per share: $0.088: @danny rimer/@Index Ventures, @Semil, Jacobsen/OATV A $0.199: @John Lilly/@Greylock B $0.332: @Mamoon Hamid/@Kleiner Perkins C $1.098: @Andrew Reed/@Sequoia Capital D $4.619: Peter Levine/@a16z

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Exercising all of your options early would’ve been risky as Figma was still a small company (only ~$4 million in ARR) and far from a sure thing However, because the strike price would match the 409A price, you wouldn’t have to pay taxes upon exercising your shares

(Note: the strike price is the price you can buy your shares at and the 409A price is the most recent valuation price When you exercise your options, you are taxed on the difference between these two prices: immediately for NSOs, and deferred for ISOs until you sell your shares)

Fast forward a few years and that stake is now worth $10.05m (250k shares * $40.20 price per share at sale) in a 50/50 combination[0] of cash and $ADBE stock [0] According to Bloomberg

On the $ADBE half, you’ll likely have a direct stock transfer which won’t impact taxes immediately On the cash half, if you live in CA, you’ll pay a 37.1% tax rate (23.8% federal capital gains + 13.3% CA tax) All in, you end up with $8.16m: $5.03m ADBE stock + $3.13m in cash

On the flip side, you may have waited until the Figma acquisition to take action on your equity In this case, you didn’t exercise your options while Figma was private and now are facing a liquidity event

Obviously, the Figma acquisition is still great news – this is a clear win for anyone involved with Figma (founders, employees, and investors alike) But because didn’t exercise your options earlier, you’ll face a larger tax bill now (ordinary income vs long-term capital gains)

While your $ADBE shares will still be worth $5.03m, you’ll take home $2.48m in cash (vs the $3.13m in cash if you had exercised earlier) In this scenario, the cash would be treated as ordinary income and be taxed at 37.0% federal + 13.3% CA

In this scenario, the big question is if you should early exercise or not. The tradeoff is: - Investing $83k at a time when the company’s future is risky and uncertain compared to - The benefit of over $657k in tax savings at the time of acquisition

Of course, this thread: - is merely an illustrative example - isn’t financial advice - requires personal financial info to provide a recommendation - is focused on one of the (very) few startups to announce a successful exit this year

So what can you do? If you’re a Figma employee, take stock of your situation. Figure out: - How many options you own - Your tax burden - A strategy for your new cash and $ABDE stock

If you’re working at a different tech startup, this should be used as a reminder to figure out your own options situation Spend the time making a choice Even if you don’t exercise now, understanding the implications could be worth hundreds of thousands of dollars in an exit

In either situation, a financial and/or tax advisor can help you through these questions as you navigate startup equity and the IPO (Here at @compound we specialize in helping tech employees with these exact problems)

Equity, taxes and all the complexity that come with it aren’t easy to understand (and are much less exciting than actually building companies) Hopefully you learned something from this thread To learn more about personal finances for tech, follow this account @compound

compound

@Compound

Compound is a family office for people who work in tech. Built by engineers who understand QSBS and CFAs who understand APIs.

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