Options & PE Buyouts: Is the "Dry Tax" risk as bad as it looks?
I've recently started a job in a PE backed firm (a SaaS company).
I’ve been offered a Non-Tax Favored (unapproved) option grant which I've not dealt with before. Not these nice RSUs many in this sub get! Looking at the plan docs, I’m concerned about the risk of a 'liquidity trap' in the provisions.
Per the doc I need to sign, I give them a lot of control including broad waivers and "irrevocable proxies". I'm worried about scenarios such as a PE buyout where the Board uses its "sole and absolute discretion" to substitute my current options for shares or options in a new Successor Corporation. Effectively, if the move triggers a taxable exercise , I’d be hit with a massive income tax bill on the "gain" , but I’d be left holding illiquid paper in a new PE backed successor with no way to sell and cover the cost. Even in an IPO scenario, a 180-day mandatory lock-up means the tax is fixed at exercise, but I’m exposed if the price craters before I can sell.
Has anyone actually been caught out by things like this in real life?
I am a cautious person who tends to have a skeptical view on my dealings with my employers, so I'd likely benefit from some reality checks from people who've been through the wringer.
To be honest I'm thinking of politely declining the grant even if it risks rocking the boat a bit. I'm skeptical it will amount to much more than magic beans, and while the company is assuring me they are "standard plans," I'm starting to get a feeling there is more potentially downside than up to signing.
Thanks!