What they likely meant was that the options would eventually be worth $5m, but not when they left the company and could exercise them.

The paper value was far lower during the exercise window & no guarantee it would ever be liquid. The AMT would also have dwarfed the 10k.

You typically don't know what they're worth when you exercise the options. Often it turns out to be nothing.

The options were likely 10k when he was issued them at hiring. When leaving the company, he would need to purchase those options (likely within 90 days if it's a shitty policy). Then, the real kicker is that he would have to pay taxes on the on-paper gains between the 10k and the current valuation. So lets say the company was worth half of what it was at IPO, he would now own 2.5m of stock, owe taxes on 2.49m of income, and have to pay that off with early engineer salary and no liquidity on his equity.

No liquidity? He said the company went public…

I know people don’t get the best deals on startup equity but something doesn’t add up here

>> No liquidity? He said the company went public… >> I know people don’t get the best deals on startup equity but something doesn’t add up here

Many startups stay private for 7-10 years. Most go broke, shut down, or have face-saving acqui-hires with no economic gain. If you leave at year 1,2,3,4,5, or 6 you have to pay UPFRONT to exercise the options and pay taxes UPFRONT. But you are stuck with private stock you cannot sell. In 95% of cases, the private stock can never be sold because the company goes broke. You dont know if your company, in year 7, 8, 9, 10, or beyond MIGHT be one of the lucky 5%

If you are going to spend $100k or $500k exercising options and paying taxes, you might as well buy QQQQ or NVDA or something with better odds of success.