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Handcuffed to Uber

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Re: Handcuffed to Uber

#31

Post by heyjonboy »

scurvy wrote: post #26
heyjonboy wrote: post #11

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.

Actually, it depends. In Uber's case yes it would be the 409A as there is no secondary market. If there were a secondary market, it would be the last sales price from the day you exercised, not 409A value. The IRS guidelines say the spread between grant price and fair market valuation. If there's a secondary market, that's your fair market, not 409A (which is a joke anyway). Also, most companies use the last public v…

No, that's incorrect (speaking as a founder who's raised $35mm and sold shares on the private market). Private financings will trigger a new 409a valuation but won't influence it. 409A valuations are typically based on Black Scholes and have no connection to private funding valuations. Secondary sales only affect fair market if there's a functioning secondary market, and AFAIK there are no private startups with a FUNCTIONING secondary market.

Re: Handcuffed to Uber

#32

Post by myblake »

pcl wrote: post #14
heyjonboy wrote: post #11

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.

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.

True but it's at least mentioned. Would be worth emphasizing the effect it would have though, that engineer is not really sitting on 300 million.

Re: Handcuffed to Uber

#33

Post by myblake »

jsprogrammer wrote: post #13
yummyfajitas wrote: post #8

Earlier quoted context omitted.

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?

I think the suggestion is that they'd merely own part it, but nonetheless it's not surprising the irs would prefer liquidity.

Re: Handcuffed to Uber

#34

Post by scurvy »

heyjonboy wrote: post #31
scurvy wrote: post #26

Earlier quoted context omitted.

Actually, it depends. In Uber's case yes it would be the 409A as there is no secondary market. If there were a secondary market, it would be the last sales price from the day you exercised, not 409A value. The IRS guidelines say the spread between grant price and fair market valuation. If there's a secondary market, that's your fair market, not 409A (which is a joke anyway). Also, most companies use the last public v…

No, that's incorrect (speaking as a founder who's raised $35mm and sold shares on the private market). Private financings will trigger a new 409a valuation but won't influence it. 409A valuations are typically based on Black Scholes and have no connection to private funding valuations. Secondary sales only affect fair market if there's a functioning secondary market, and AFAIK there are no private startups with a FUN…

You can do 409A however you want which is why I said it was a joke. I've worked in 2 places that based it off of last round after accounting for full dilution. You can use black Scholes, last round, or your finger in the air it doesn't matter. If it had to be accurate they wouldn't allow Black Scholes which has been all but disproven.

Also there are lots of secondary markets for private companies right now. What makes you think otherwise?

Re: Handcuffed to Uber

#35

Post by joncalhoun »

jsprogrammer wrote: post #13
yummyfajitas wrote: post #8

Earlier quoted context omitted.

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?

They wouldn't, and the original poster isn't implying that they would.

I believe the argument here is that if the government wants to claim that these shares have a certain monetary value for tax purposes, then the government should stand behind that value and allow you to pay taxes with those shares at their claimed monetary value.

The end goal would be to prevent small business (or people with stock options) from going under because the government claims a piece of paper is worth $1m, but in reality it can't be sold at all, or couldn't be sold for such a high value. If the government claims "oh but we would lose 20% of the value in selling these shares" then they are essentially admitting that they overvalued them when taxing you.

Re: Handcuffed to Uber

#36

Post by jsprogrammer »

myblake wrote: post #33
jsprogrammer wrote: post #13

Earlier quoted context omitted.

Why would the IRS want to own and manage family businesses?

I think the suggestion is that they'd merely own part it, but nonetheless it's not surprising the irs would prefer liquidity.

The IRS wouldn't want to own any part of a business. There is no reason for them to.

Re: Handcuffed to Uber

#37

Post by draw_down »

heyjonboy wrote: post #11

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.

I'd call that inaccurate but not wrong.

Re: Handcuffed to Uber

#38

Post by robbiemitchell »

pcl wrote: post #20
alistairSH wrote: post #12

In 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…

My understanding is, right of first refusal includes the option to render the equity worthless if this right is not honored. It's a threat I've seen made before by a CEO who did not want a secondary market to exist.

Re: Handcuffed to Uber

#39

Post by sopooneo »

yummyfajitas wrote: post #8
adam-a wrote: post #3

I'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…

I'm surprised financial services have not popped up just to help people in such situations. The service could confirm the person has as much coming as they say, have him sign his life away to them, and then float him enough cash to buy the stock and pay the taxes on time. Then the employee pay some portion of his new wealth to the financial services company.

Does that really not exist?

Re: Handcuffed to Uber

#40

Post by a_small_island »

vinceguidry wrote: post #4
zzalpha wrote: post #2

I'm far more curious about what will happen when these companies start seeing significant portions of their workforce facing expiring option plans...

The market solution here seems to be the companies poaching those employees giving them, as a hiring bonus, enough cash to exercise their shares. Not sure what would make that workable, or if it's even a big enough problem to demand such a solution.

It's not just the exercise price, it's the tax bill at the end of the year...
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