Thread by @ViejeP

First day of trading for Snowflake has ended and the co. is now worth $33b ($250+ per share)📈

Employees who built the company have to be excited. Unfortunately, employees who didn't plan around their stock options likely left a lot of money on the table.

A case study 👇 /1

The Series G round was priced at $38 per share. Employees who started at the co. in 2018 likely all have incentive stock options (ISOs) at <$5.

Let's use rounded/estimated numbers for this case study. Employee A at Snowflake is granted 5,000 ISOs at $5 strike. /2

The big decision: when should an employee exercise their stock options? It's the million dollar question. It's also really difficult to answer as there are lots of implications.

Most end up defaulting to doing nothing. Unfortunately, that can be a costly decision. /3

Stock options (and particularly ISOs) can have huge tax benefits if you exercise early.

Assuming the company (and 409A) continues to grow, exercising earlier means less tax on exercise. In addition, your taxes at sale gets converted to capital gains if you meet holding reqs. /4

So back to the case study. Assuming it's mid-2020 and the 409A is $30. Employee A would need to pay $25k to Snowflake for strike price and ~$28k in taxes for total of $53k. 😬

(Assumptions: CA resident, married filing jointly, $200k base income) /5

If Employee A waited to exercise until the first IPO pricing of $80 a couple weeks ago. Then the tax bill jumps up to ~$119k. 🤒/6

You probably know what's coming next. If Employee A waited until today to exercise at the $250 public price, then the tax bill goes up to ~$447k. 🤮/7

Stock options get more and more expensive to exercise. After an IPO, most will have to default to doing what's called a cashless exercise which means you buy and sell your shares in same transaction.

This is the worst tax consequence as you pay ordinary income on ALL gains. 💸/8

So why would someone volunteer to pay cash to exercise prior to IPO?

If you exercise your ISOs and hold onto it for 2 years after grant/1 year after exercise, you sell in qualifying disposition and convert everything north of your strike to preferential capital gains tax. 🏝️ /9

So let's say Employee A decided to exercise in mid-2020 when the 409A was $30. She pays $53k then waits a year before selling after IPO.

She converts entire gain to long-term capital gains and gets an extra ~$135k in her pocket or 20% better off! 😄/10

Stock options, taxes and private company valuations are complicated. Most startup employees are not well equipped to make these decisions.

Investment risk, liquidity on hand, personal situations, ability to leave job, etc. all play a factor in stock options. /11

Planning ahead allows you to mitigate these risks and costs.

Each IPO is bittersweet. I'm always happy for the employees, but I also talk to many who realize how much they left on the table.

After each IPO, I always hear the same thing: "I wish I had planned years ago". /12

So startup employees:

Make sure you create a plan for your stock options. Know the potential risks and benefits from exercising early. If you don't know, talk to an advisor or people that do know. There's too much money on the table to ignore.

/end 🥳

Also wrote more in a blog post published this morning!

secfi.com/blog/snowflake…

Thanks all! I got the IPO market cap mixed up with the closing cap, but price per shares/numbers still hold (thx all for pointing it out).

Still catching up on DMs and replies but hope to do more case studies soon 🙏🙏

Tools are free to use at secfi.com btw!