Exercising ISO via non-recourse loan: taxation?

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deanmoriarty
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Joined: Tue Jan 28, 2014 1:19 am

Exercising ISO via non-recourse loan: taxation?

Post by deanmoriarty » Thu Mar 26, 2020 10:12 am

Hello,

I am an employee who was granted a sizable amount of stock options during my tenure at the company.

Over the years, I periodically exercised my vested options and became very familiar with the mechanics of (sadly) writing checks to the company and to the IRS for AMT, and generating AMT credits. Luckily, I also engaged in some secondary transactions, so I was able to at least recoup my initial expenses, and I’m hoping that in the end I will even see a mild profit.

However, my most recent grant has a very high exercise price (due to the company valuation increasing), and I don’t feel comfortable exercising those options at a such large cost per share, it’s not worth the risk at this point.

For this reason, I am considering engaging with one of the many companies who offer liquidity to cover exercise costs and AMT. This naturally comes at a very steep cost of 50% (or more) the proceeds but, considering I own many more shares “free and clear”, it’s fine with me at this point.

This company would offer me a non-recourse advance check to cover the exercise expenses, meaning that if the company goes belly up, I don't have to repay anything. My questions are:

– Is receiving the advance a taxable event during the year it is received? Should I report it to the IRS?

– How will the advance be reported in the year the startup sells? My understanding is that I will send the 50% profit cut to the company and then I’ll increase the cost basis of my shares by that much so I just get to pay taxes on my portion of the proceeds, but what about the initial loan amount? How and where should one report that?

I will of course engage with professional tax advice if needed, but I figured I could find some valuable input on the forum as well.

Thanks!

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