Maximizing Stock Options at Tax Time: Insights from Scott Chou for Tech and Game Developers

In 2024, employees at tech startups should seize the opportunity to understand the value of their stock options, especially with a resurgence of initial public offerings (IPOs) on the horizon.

Companies like Discord, Reddit, Chime, Stripe, and Klarna are anticipated to launch IPOs, making it crucial for employees to leverage their stock option benefits effectively.

I recently spoke with Scott Chou, investment expert and CEO of ESO Fund, about why many employees hesitate to exercise their options. Most often, it's due to a misunderstanding of their value or lack of financing.

Stock options are a common benefit in tech startups, yet many employees are unaware of how to utilize them—even as the stakes rise with impending IPOs. Exercising stock options can become both essential and costly.

Organizations like ESO Fund provide employees with the education and financing needed to exercise their stock options. By taking informed steps, Chou asserts that employees can gain greater control over their investment future.

Chou highlights a common misconception: many employees mistakenly believe they own stock simply because their options have vested. In actuality, vested stock options require a purchase to realize their value. Employees often discover this too late, such as when they leave a company without exercising within the typical 90-day window.

Another oversight revolves around the Alternative Minimum Tax (AMT) implications triggered by exercising stock options. Chou discusses the nuances of IRS Form 3921 and its importance in understanding tax liabilities.

Interview Highlights with Scott Chou, CEO of ESO Fund

Question: How does the broader economic landscape affect your advice to employees, particularly in light of recent industry layoffs?

Scott Chou: The issues surrounding stock options are not exclusive to the gaming industry. Concerns arise across all venture-backed tech sectors. Many employees only realize that their options require purchasing when faced with layoffs or resignations. The critical takeaway is that options hold no value until exercised.

In a layoff, this usually triggers a 90-day exercise window. To mitigate employee anxiety, companies sometimes offer Non-Qualified Stock Option (NSO) extensions, which can alleviate the financial burden during these transitions.

Question: Is the 90-day rule standard?

Chou: Yes, it is an IRS requirement. Some companies may shorten the period; for example, Uber historically limited it to 30 days. Extending beyond 90 days can convert Incentive Stock Options (ISOs) to NSOs, which many companies choose to do, but it's not mandatory.

Question: What calculations should employees make before exercising options?

Chou: The primary factor is risk assessment. Exercising options involves forecasting the potential value of the company, which can be daunting. This is where ESO Fund can assist—our financing allows employees to exercise options without upfront costs, preserving their capital for diversification into other investments.

Question: What role does ESO Fund play in this process?

Chou: We provide capital for employees to exercise their options and cover tax liabilities, taking a percentage of future gains. Our model ensures that employees have a safety net, as even in the worst-case scenario, they gain a tax write-off if the stock fails.

Question: What tax-related pitfalls should employees be mindful of?

Chou: A widespread mistake is exercising shares and selling them for profit, resulting in double taxation—once during the exercise and again upon sale. Employees should explore strategies like self-recovery swap exercises, wherein taxes are only incurred at the exercise point, not during the sale.

Additionally, many employees underestimate their tax obligations, particularly regarding ISOs in high-income states like California, where AMT can apply unexpectedly.

Conclusion

The landscape for stock options in tech startups is rapidly evolving, especially with anticipated IPOs. Employees who wish to maximize their investment benefits should consider seeking guidance and financing options from organizations like ESO Fund, ensuring they navigate the complexities of stock options and taxes effectively.

For more insights and resources on exercising stock options and optimizing tax strategies, visit for comprehensive FAQs, calculators, and educational materials.