Simon Willison’s Weblog

Is it common a Silicon Valley startup give employee free shares, or just option to purchase shares?

31st October 2013

My answer to Is it common a Silicon Valley startup give employee free shares, or just option to purchase shares? on Quora

The problem with giving people shares outright is that they have to pay tax on them. If the company later goes bust (as many do) and the shares hence prove to be worthless, the employee has paid tax on something that has no actual value.

In some cases, employees might not be able to afford to pay the tax in the first place—which is a problem even if the shares do later turn out to be worth a lot of money.

Options solve this problem by not requiring the employee to pay any tax when the option is granted. If it later turns out to be worthless, the employee hasn’t lost out (aside from the opportunity cost of joining another company instead).