Stock Options

What are the risks of converting stock options into equity?

Dimitry Rotstein Founder at Miranor

October 1st, 2016

I've worked in a startup for a while and earned a certain amount of stock options.
Now I want to buy this stock (i.e. convert options to actual equity), but the CEO strongly suggests that I wait a year or so before doing that, and I don't understand why. The stock price for me is so insignificant that it's not a factor at all. The CEO claims that having stock would make me fiscally (or even legally) responsible for the company in case of some trouble (lawsuits, debt on loans, etc.)
I find that hard to believe. The company is registered as LLC, I don't work for the company anymore, and at most I'd own 1.2% of the company, so why should I be responsible for company's debt, even if there was any?

What do you think? Is the CEO's advice reasonable, does it sound right to you, or there something else behind it?
A-level teams with B-level ideas succeed. B-level teams with A-level ideas fail. This course provides a comprehensive roadmap for building a standout team, teaching everything from hiring to structure, compensation, and culture.

Brendon Whateley Founder at Kugadi

October 1st, 2016

Well, there is a problem. An LLC can't issue stock.

Ownership would make you a member and profits would pass directly to you each year in proportion to your ownership percentage. I'd strongly suggest you get legal advice after reading: http://www.investopedia.com/ask/answers/052515/can-limited-liability-company-llc-issue-stock.asp

BTW, this is why LLCs are not a good vehicle for startup formation, it makes a lot of "normal startup funding related activities" much more complicated than is the case with a C-Corp.

If it was a C-Corp, then the danger of exercising stock options is that you can end up having to pay taxes on your "gains" (the difference between the grant price and the official price when you exercise) even if they only exist on paper. Ideally you would buy the stock when it is granted and make an 83(b) election. That gives you the most tax advantaged outcome if there is an upside. The risk is that you will probably lose your purchase price. 

To really understand this stuff, you need to read one of the many books on options grants and/or consult your tax person. There are a lot of details that really matter a lot!

Good luck.

Dimitry Rotstein Founder at Miranor

October 1st, 2016

> a year seems to be too long since you are not with company anymore.
> Check agreements, typically ex employees have up to 3 months to box very options to stock

The agreement says I have up to 18 months to exercise the options, so on this point the CEO is legit.

Aleksey Klempner

October 1st, 2016

Your CEO reaction is puzzling for a couple of reasons.
1) it is not exact. He/she should know the facts
2) year seems to be too long since you are not with company anymore. Check agreements, typically ex employees have up to 3 months to box very options to stock. Otherwise they go back to pool of 

Dimitry Rotstein Founder at Miranor

October 1st, 2016

> Well, there is a problem. An LLC can't issue stock.
> Ownership would make you a member and profits would pass directly to you
> each year in proportion to your ownership percentage.

Hmm, strange. Perhaps in my country (Israel) LLC has a somewhat different meaning. In fact it's called LTD here, but I happen to know that US's LLC is the closest equivalency to Israeli LTD. But perhaps not exactly equivalent.
In any case, the link you provided does confirm that a member of an LLC is protected against debts and lawsuits, so that's good.