These Startup Workers Thought Their Company Stock Would Make Them Rich. Instead They Got Worthless Shares and Massive Tax Bills.

So long, IPO windfall.

Photo by Scott Olson/Getty Images

A little more than a year ago, Good Technology stock was pegged at $4.32 a share, and the unicorn startup was making plans to go public. It never happened. Instead, the company entered a downward slide. When it was announced in September that BlackBerry would purchase the company, the deal priced shares in the mobile support service firm at 44 cents.

While high-level executives holding preferred stock received guaranteed payouts totaling in the millions, those lower in the corporate food chain saw their paper profits vanish. Some got left with a huge tax bill, too.

According to a report in this morning’s New York Times by Katie Benner, even as corporate honchos were aware that an “outside appraisal firm” had priced the firm’s common stock at 88 cents a share in June, employees were still purchasing company stock at $3.34 a share in August. Others paid taxes on stock grants made when the shares were valued at higher levels than the eventual sale price. In some cases, the employees apparently held onto the stock in hopes it would increase in value, borrowing money or using other savings to pay their IRS bill. “Many employees may not recover what they’ve lost,” one was quoted as saying. “Employees essentially ended up paying to work for the company.”

This story should sound familiar to students of the dotcom bubble. Then, as now, men and women flocked to Silicon Valley startups, lured by the promise of stock options that were sure to increase in value. For many, it didn’t work out that way. When the going was good, employees took advantage of incentive stock options to purchase stock at less than the market price. But they had to pay a tax bill on the difference between their cost and the market price of the stock. (Of course, during the dotcom-bubble era, many of the companies involved were publicly traded. There was an objective market valuation of the stock on the day they took advantage of the deal.)

While many financial advisers at the time cautioned all the newly flush employees to immediately sell enough stock to pay their eventual IRS levy, others begged them to hold on, telling them they would be giving up potential market gains if they did the prudent thing. The result? When the dotcom bubble popped, more than a few got stuck with tax bills they couldn’t pay. Their stock was all but worthless.

But the IRS didn’t care about losses the workers incurred. It wasn’t concerned about the plight of the former paper millionaires. It only cared what the stock was worth on the day the employees exercised their options to buy.

And, to be fair, some did try to urge caution. As far back as 1998, the Wall Street Journal wrote, “Options—which can well turn out to be worthless—place undue risk on many unsuspecting employees.”  The same is true now. In 2012, Douglas Greenberg, writing for the San Francisco Chronicle, recalled the dotcom-bubble era in a blog post, adding the warning, “In case you are hoping to be the next Instagram (or even not), I have some valuable tax advice for you. Beware of incentive stock options.”

But people forever want to believe. When it comes to employee stock options offered by startups, it’s likely we’ll hear more stories like this if more unicorns fail to live up to expectations. They will, in fact, almost certainly be more common than unicorns.