An interview with Scott Chou on how tech and game developers should approach stock options during tax season

Tech and game developers who have stock options should pay attention to the value of their options during tax season, according to investment expert and ESO Fund CEO Scott Chou. With tech initial public offerings (IPOs) expected to make a comeback in 2024, employees at startups such as Discord, Reddit, Chime, Stripe, and Klarna have the opportunity to take advantage of this benefit. However, many employees fail to exercise their options either because they don’t understand their value or lack the necessary financing.

Chou highlights the importance of understanding the difference between stock and stock options. While employees may think they have “stock” as it vests, they often don’t realize that they need to purchase the options if they leave the company or risk losing them. Another common mistake is not realizing that exercising stock options can trigger a significant amount of Alternative Minimum Tax (AMT) liabilities. Chou suggests familiarizing oneself with IRS Form 3921 and seeking education and financing from organizations like the ESO Fund to navigate these complexities.

Chou also discusses various considerations when deciding whether to exercise stock options, such as the risk associated with the company and the potential tax implications. He explains that the ESO Fund provides capital for employees to exercise their stock options and pay their taxes, sharing both the downside risk and potential benefit with the employee. The ESO Fund also offers services such as tracking company health indicators and providing information on secondary markets.

In terms of resources, Chou recommends reaching out to organizations like the ESO Fund for guidance and utilizing their website, which offers FAQs, primers on various topics, and calculators for taxes and AMT. He emphasizes the importance of understanding tax planning strategies and utilizing tools like simulated tax returns to optimize tax savings.

Regarding dilution risk from subsequent fundraising, Chou explains that dilution is a fact of life in startups and that the focus should be on whether the stock value is increasing. He advises employees to consider the overall growth and success of the company rather than obsessing over their percentage ownership.

In conclusion, tech and game developers should take advantage of the value of their stock options during tax season by seeking education, understanding the tax implications, and exploring resources like the ESO Fund. By doing so, they can navigate the complexities of exercising options and potentially benefit from the future success of their companies.