This article is wrong. Option strike prices and taxation are based on the 409A "fair market" valuation, not private valuations achieved during fundraising. Move the decimal one place to the left and the numbers in the article get a bit more realistic.
Handcuffed to Uber
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Re: Handcuffed to Uber
#12In the past, when my wife has had options, we've always been able to use cash from the exercise and immediate sale to fund the transaction, with no cash out of pocket. Is this not an option available to Uber employees?
Re: Handcuffed to Uber
#13I've not been in the position of buying options before, but is that really how the tax system works? I understand you have to pay tax on income from shares, but if you're buying shares you haven't had any income from them at that point right? I would have thought you'd just pay tax on any money you received when you sold the shares. Curious to know if that's how it works in the UK as well as the US, anyone have any p…
Yes. It's a huge problem - the IRS demands liquid cash in order to pay tax on illiquid in-kind transfers. The problem isn't just in startups with stock options; another big place it arises is closely held businesses. You receive the family business as an inheritance and suddenly you need to pay - in cash - 40% of the value of the business. Such a large cash hit can and does destroy many companies. The solution is of…
Why would the IRS want to own and manage family businesses?
Re: Handcuffed to Uber
#14This article is wrong. Option strike prices and taxation are based on the 409A "fair market" valuation, not private valuations achieved during fundraising. Move the decimal one place to the left and the numbers in the article get a bit more realistic.
Yes, and the math early in the article doesn't account for dilution.
But those numbers are still colossal, even when reduced by an order of magnitude or two.
Re: Handcuffed to Uber
#15I'm far more curious about what will happen when these companies start seeing significant portions of their workforce facing expiring option plans...
Is that a thing? I didn't know options can expire, what kind of an expiration date do they have?
Yes; options often expire 10 years after issuance.
Re: Handcuffed to Uber
#16This article is wrong. Option strike prices and taxation are based on the 409A "fair market" valuation, not private valuations achieved during fundraising. Move the decimal one place to the left and the numbers in the article get a bit more realistic.
It also pretends all of those would be taxed as income when that would likely be AMT.
Re: Handcuffed to Uber
#17In the past, when my wife has had options, we've always been able to use cash from the exercise and immediate sale to fund the transaction, with no cash out of pocket. Is this not an option available to Uber employees?
That's an option if they're acquired or IPO. This is more about quitting and exercising before either of those events happen.
Re: Handcuffed to Uber
#18In the past, when my wife has had options, we've always been able to use cash from the exercise and immediate sale to fund the transaction, with no cash out of pocket. Is this not an option available to Uber employees?
That depends on whether there is actually a market for Uber shares. In the few cases where I've had the ability to exercise options, the company was still entirely privately held and there was no general market for the shares. And nobody was really interested in buying mine, so there was nobody to sell to, even though on paper you could calculate a value.
Re: Handcuffed to Uber
#19I've not been in the position of buying options before, but is that really how the tax system works? I understand you have to pay tax on income from shares, but if you're buying shares you haven't had any income from them at that point right? I would have thought you'd just pay tax on any money you received when you sold the shares. Curious to know if that's how it works in the UK as well as the US, anyone have any p…
The problem isn't with the tax system, but the corporate system.
Companies are giving out time-limited stock buying privilege to employees instead of direct ownership. Additionally, some companies can even revoke the privilege through termination of employment agreements.
If employees were treated as full owners, there wouldn't be a problem.
Re: Handcuffed to Uber
#20In the past, when my wife has had options, we've always been able to use cash from the exercise and immediate sale to fund the transaction, with no cash out of pocket. Is this not an option available to Uber employees?
There's no liquid market for Uber shares. The article further states that Uber has taken measures to prevent a secondary market from developing. I wonder what those measures are. I imagine it's straightforward to prevent someone who wants to keep working at Uber from doing a secondary sale, but what sorts of contract terms can Uber put in place to prevent someone from quitting and then selling on the secondary market?
Rights of first refusal are common, but how can Uber prevent a non-employee from selling? I'd love to see the language they use in their options agreements.