My boss nonchalantly slides a crisp sheet of paper onto my desk. I know immediately that it’s something to do with my stock options but all I see is jargon.
I was clueless and completely new to the world of startups. Within three months, I went from pursuing medical school to being one of ten employees at a tech startup in San Francisco.
“Make sure you file that 83b within 30 days.”
My boss registers my blank face and lingers a moment longer before adding, “You can get into tax trouble if you don't.”
My pulse quickens. Hearing “tax trouble” induces an unwelcome wave of nostalgia.
As a child of immigrants, I’ve been handling complicated tax issues for my parents since I was twelve years old. The IRS and I are on friendly terms for the most part—they’re like the relatives you dread seeing on Thanksgiving. Regardless, you grit your teeth and make pleasant conversation because that’s the appropriate thing to do. Be good company and you might avoid unwanted interaction until the next turkey day.
“Got it…will do!” My boss nodded once and walked off. I kept my word and speedily filed that 83b, despite my confusion on what “tax trouble” meant in this context.
Turns out it didn’t matter because a few years later, the company went under. My stock options were worthless. But that’s the risk you bear when joining a company so early.
It wasn’t until I joined Notion that things got interesting. As an early employee, I got my hands dirty: stock option planning, tax implications, tender offers, and so on.
I won’t dive deep into the nuts and bolts of it all, because this essay would get longer than most of our attention spans can handle, and there are tons of resources out there for that anyway (I’ll link my favorites in the appendix).
Rather, I want to dive into what navigating stock options is actually like for early employees—starting with the types of employees themselves.
Ready player one
Navigating stock options is kind of like a video game.
It’s a game of timing. It’s knowing when to commit and detach accordingly. It’s asking for help when you need it, and acting quickly once you know your game plan.
There is no “winning” strategy in this game because there are simply too many factors outside of your control: the company’s valuation, the market’s appetite, stock dilution, and pure luck to name a few. Also, we’re all at different starting places in life: some have an abundance of capital ready to deploy, and others might be knee-deep in student loan debt. You have to work with what you’ve got.
While some may assume that dollar amount is the primary metric in this game, I’d argue that “winning” is unique to the individual. Navigating stock options is a single-player game.
More specifically, a winning strategy meets the following criteria:
Factors in your unique circumstances (e.g. how much capital you have access to, risk tolerance, and other life priorities)
Minimizes unnecessary tax burdens
Gives you peace of mind
Choose your character
We all have varying levels of financial literacy, access to capital, and risk tolerance that influence our gameplay. Here are 6 types of startup employees, or common characters, I’ve observed during my time in the industry.
The noob
This is their first rodeo at handling stock options that have a decent chance of being worth something. At first, they’re likely to feel overwhelmed with the slew of acronyms densely packed in their offer letter and Carta documents.
They’re not sure what questions to ask and who to even direct them to. Everyone else just seems to get it (or at least it looks that way).
At times, it’s akin to a real-life version of Minesweeper. The objective of Minesweeper is to clear the grid of tiles without detonating any mines. When deciding what to do with stock options, especially for the first time, any action feels daunting.
One ill-informed move—BAM! You’re hit with a tax bill that makes your eyes water.
Maybe you decide to play it safe—well, tough luck, you missed out.
Or maybe you decide to go all in—game over, try again next time.
My point is that this entire thing is a gamble. You can optimize all you want, there are simply too many factors outside of your control and too many configurations that make your head spin.
There’s a simple solution to all of this: Hire a fiduciary tax expert who specializes in stock option strategy. (Message me if you need an intro to one. I don’t get kickbacks on referrals—she’s just good).
Regardless, the game strategy I’ll give to this character is this: Don’t be afraid to go deep. This is an incredible opportunity to level up your financial literacy. Turn over every stone. Know your numbers for every obscure acronym. Preparedness minimizes fear.
Don’t know where to start? I’ll include my favorite resources and a list of numbers you should know in the appendix.
Sometimes as companies mature, they hire someone on the Finance team who educates employees about their stocks (Notion hired someone fantastic, s/o to Miranda) but I don’t think this is the norm and chances are, if you joined early, you won’t see someone like this for years. Companies typically don’t go out of their way to educate their employees, so the onus is on you.
The veteran
This is the millionaire next door. They successfully leap-frogged from one unicorn to another, collecting stock options like power-ups in Super Mario.
They were at the right place at the right time and were one of the lucky few to see it through to the harvest. This advantage allows them to take the fruits of their labor and fertilize new pots of land.
They know the secrets of early exercising and do it fast. They have the capital to absorb the initial cost of purchasing their stock options and the accompanying tax burden if any.
They know the ins and outs of tax savings because they went through it all before.
The game strategy for this player is to sit back and enjoy the ride.
We all want to be leap-froggers, but just remember they were noobs once before!
Sometimes, the best way to get acquainted with stock options is to ask your colleagues. Know anyone who was an early employee before at a successful startup? Ask them if they can explain it to you like you’re five. More often than not, they will share their knowledge or at the very least, point you to a professional that can help.
The optimizer
With enough luck on their side, all players eventually come to a fork in the road: do you or do you not play the tax optimization game?
The optimizer is all-in on this game.
It may or may not be their first time handling stock options of meaningful value but they tend to have high financial literacy (or at least high intent to gain it). They get a thrill out of configuring the most optimal path that maximizes gains and minimizes tax burdens.
They love their spreadsheets and are eager to show you all of the scenarios they mapped out depending on the fluctuations of the company’s valuation and their exercise strategy.
Even though involving a tax professional in this process is essential, being able to create bare-bones projections like this is a valuable skill and demonstrates a deep understanding of the subject matter.
That said, the optimizer tends to get a bit obsessed.
Ten-minute break between meetings? Spreadsheet.
Discouraged after a meh performance review? Spreadsheet.
Got a promotion? Spreadsheet.
You get the idea.
The procrastinator
The procrastinator tends to have an avoidant relationship with money. They might have some emotional baggage from childhood—likely rooted in fear—that has followed them into adulthood.
Because of this, figuring out what to do with their stock options feels too overwhelming to begin with.
So instead, they choose to do nothing.
Doing nothing can be a fine strategy if it’s a deliberate choice. But doing nothing for the procrastinator is not a strategy, it’s a by-product of avoidant behavior.
This avoidant behavior eventually blows up on itself because it creates compounding anxiety that they’re somehow dropping the ball without even knowing what is being dropped.
The best game strategy for the procrastinator is to acknowledge the avoidance and outsource. Get a referral for a tax expert from someone you trust, so they’re pre-vetted, and let the professional tell you what to do instead.
The complainer
Remember when I said there is no “winner” and that this is a single-player game?
The complainer often forgets that.
They compare the amount of stock options they own with others around them and lament over why so and so was granted more, even if that person joined the company later than them or was hired for a similar role.
There could be a myriad of reasons: that person negotiated harder, they were a more attractive candidate, so they were given a more competitive offer, their role is more valuable to the company, and so on.
Regardless, there’s no point in feeling like you got the short end of the stick, because at the end of the day, you can’t be certain why the other employee was offered something better.
The game strategy I’d suggest for the complainer is simple: keep your eyes on your own paper. After all, comparison is the thief of joy. But in the rare scenario that something is actually wrong, talk to HR about re-evaluating your compensation to ensure it’s fair and equitable.
The realist
“I’ll believe it when it hits my bank account.”
The realist believes that no matter how many stock options they have, it’s monopoly money at the end of the day.
They tend to have high financial literacy and have been in the game long enough to know anything can go wrong, at a moment’s notice. They are disillusioned by the whispers of, “I think we’re going public this year.” Instead, they chose an exercise strategy, executed it, and never looked back.
The realist is a good role model to us all because their practical—perhaps a tad cynical—perspective keeps them and others around them grounded. The optimizer would probably benefit from spending some time with them.
Simply put, they live their lives as if their stock options don’t exist.
Until there’s a tender offer, a liquidity event for private companies, of course—a story for next time.
Appendix
Here are a few resources that were perpetually open as Chrome tabs during my noob era:
If you’re not sure where to start, figure out what these numbers are—ask HR, Finance, or any of the founders if you don’t know.
Your total shares
Note: The two most common stock options are ISOs (Incentive Stock Options) and NSOs (Non-Qualified Stock Options). The difference between them is when and how you are taxed. If you have RSUs, these are not stock options and function more as grants. RSUs are typically issued by later-stage companies and are fairly straightforward to navigate.
Total company shares
Note: This will help you understand what % of the company you potentially own. Unless you’re a founding engineer, expect this number to be way less than 1%.
Current company valuation
Note: This doesn’t really affect you directly, but it’s a good proxy to help you understand how much your options are being valued.
Take these numbers with you and go shopping for a tax professional who specializes in stock option strategy. Set up consultation calls to start (most often it’s complimentary) and have them explain it to you.
Even though there are countless resources online, it’s worth including a professional early on because everyone’s situation is unique and the tax system is way too intricate to DIY. As a rule of thumb: before you exercise any options, run it by a tax professional first. Good luck—you can do it!
Illustrations by Mitch Catayas.
Note to readers
If you’re reading this, it means you got to the end—thank you! I hope you enjoyed this light-hearted take on the different types of startup employees and their different stock option journeys.
Did any of the characters resonate? Did I miss any?
Leave a comment and let me know 🙂