Who pays when startup employees keep their equity? • Hacker News Board

Re: Who pays when startup employees keep their equity?

#41

Post by URSpider94 » Tue, Jul 05, 2016, 6:17 PM UTC

superuser2 wrote: post #27

ktothemc wrote: post #17

Wouldn't RSUs open employees to a different and more punitive tax regime (income tax) than options (which would fall under capital gains if you exercised early enough)?

I believe if you hold your RSU-granted stock for 1 year, you can pay capital gains tax on it instead. I'm not a CPA.

But, you have to pay income tax on the value of the shares at the time when they vest, i.e. become non-restricted. You have zero control over that vesting schedule, and thus the tax bill, and you likely wouldn't have a liquid market for the shares before an IPO.

Any gain post-vest can indeed be long-term cap gains, if you hold the shares > 1 year.

Re: Who pays when startup employees keep their equity?

#42

Post by bradleyjg » Tue, Jul 05, 2016, 6:18 PM UTC

shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

Going the cash route has a higher expected value but a lower variance. Different people have different attitudes towards risk.

Re: Who pays when startup employees keep their equity?

#43

Post by gringofyx » Tue, Jul 05, 2016, 6:20 PM UTC

dasil003 wrote: post #28

gringofyx wrote: post #5

Either way it's a losing game, consider a company like Google - how would they attract new employees on either scheme given that the company has been around for 15+ years? The only people who win are those who get in early, or invest big. Any IPO ultimately results in people earning money who don't "work" for that money - that means the actual workers lose out everytime.

So getting paid way above market and working at a place where software engineering talent is highly respected and valued is "losing out"? I'm sorry but this entitled attitude just grates at me. If you are in SV getting paid 3-5 times the median household income you already are in the 1% and you already have all the advantages in terms of upward mobility. If you want to earn millions go out and start your own company…

1. Not all employees are paid above market value

2. Working somewhere that software engineering talent is highly respected is no measure of fiscal compensation

3. Those advantages of upward mobility are learnt, or acquired skills that people work at. There is no opportunity for them to be in the same position as a 1%er living off their parents money to invest and then continue to get rich(er)

4. You imply that employees have the ability to negotiate on-par with any investor

5. Your last point about $100k is odd, that's just supply and demand in a free market - and the sentiment is doubley-odd given that employee salaries have stagnated since the 70's, SV salaries have been proven to be (somewhat) rigged, also it is in any companies corporate interests to pay the lowest possible amount for any resource.

Lastly, your point about the 1% of the 1% is off-topic - and I agree that they're not necessarily to blame for the widening gap between rich and poor - but without proper incentives for the 99% to go to work, then that 1% of wealth could become worthless if society revolts because of the disproportionate distribution.

My point is simply that alternative vehicles for employee remuneration need to exist beyond the status-quo that's legally existed for decades.

Re: Who pays when startup employees keep their equity?

#44

Post by cloudjacker » Tue, Jul 05, 2016, 6:21 PM UTC

timcederman wrote: post #26

There is a downside to RSUs. Say you work for a private company with a high valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years. That means you are vesting $2.5m of RSUs over 4 years, and these RSUs are taxable at that amount. Typically for folks earning over $150k/year in base salary, particularly if married, even half as much will put you into AMT territory, and you will end up paying a si…

You know the simple solution to this is that companies withhold the amount of RSUs from you that would be taxed, when they vest.

Its almost like so simple of a solution that reporters won't touch it.

edit: nevermind. even the company cant pay the tax with their illiquid RSUs so its still a problem, and a bigger problem if the share valuation increases, pre-IPO

Re: Who pays when startup employees keep their equity?

#45

Post by ericd » Tue, Jul 05, 2016, 6:22 PM UTC

codeonfire wrote: post #30

iaw wrote: post #8

Earlier quoted context omitted.

This comment isn't very productive. Some high-level valley participants are definitely bad actors but the bulk of them are just normal people in positions of power.

Normal people that like money. If this article is about how equity compensation can be improved, then that is a fairly messed up world view and kind of insulting. Employee equity compensation is always designed to explode or have no value. Workers are sick of the schemes. Just pay cash. Companies don't want to and never will improve equity compensation. A better solution would be a law that requires a cash value of g…

Actually there's a big movement to making options exercisable well after employees leave. So, no.

Startups don't have enough cash to compete in terms of pure salary with the leverage that the Googles of the world have. And stock can turn out very well for employees, I've seen it happen at a fairly good rate. You just need to make sure you're getting what you're worth, risk adjusted.

Re: Who pays when startup employees keep their equity?

#46

Post by iandanforth » Tue, Jul 05, 2016, 6:22 PM UTC

jedberg wrote: post #18

This is where having a lobbying group would be helpful -- this really needs to be fixed through policy. We need to get the tax law changed so that RSUs are taxed on liquidity instead of vesting. Then you'll still avoid the corruption the tax is supposed to protect against (paying an executives millions in what was previously untaxed compensation through RSUs in the 80s) but still allowing them to be given as startup…

Can you go into a bit more detail on what counts as liquidity? Can I sell on a secondary market? Can a bank let me guarantee a loan based on my current units? Can non-liquid units be transferred to my next of kin tax free?

Re: Who pays when startup employees keep their equity?

#47

Post by JonFish85 » Tue, Jul 05, 2016, 6:22 PM UTC

home_boi wrote: post #37

timcederman wrote: post #26

There is a downside to RSUs. Say you work for a private company with a high valuation, e.g. AirBnB at $25B, and you are granted 0.01% equity over 4 years. That means you are vesting $2.5m of RSUs over 4 years, and these RSUs are taxable at that amount. Typically for folks earning over $150k/year in base salary, particularly if married, even half as much will put you into AMT territory, and you will end up paying a si…

Does the government take private RSU's as payment for taxes? It seems unfair to tax people for equity that even the government itself doesn't value.

Of course not, the IRS takes cash. It's far simpler that way, and probably will remain that way for quite awhile.

Re: Who pays when startup employees keep their equity?

#48

Post by landryraccoon » Tue, Jul 05, 2016, 6:23 PM UTC

bradleyjg wrote: post #42

shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

Going the cash route has a higher expected value but a lower variance. Different people have different attitudes towards risk.

I think you mean lower expected value, no? The way you put it cash is strictly better in every way than options - both higher expectation and lower risk. According to you there's no upside to options relative to cash.

Re: Who pays when startup employees keep their equity?

#49

Post by shostack » Tue, Jul 05, 2016, 6:23 PM UTC

bradleyjg wrote: post #42

shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

Going the cash route has a higher expected value but a lower variance. Different people have different attitudes towards risk.

This. And things are not really comparable to big finance jobs as the bonus is more or less expected to some degree or people leave to places where they will get the bonus.

Startups are a lottery to a large degree, and for employees without significant equity, the odds don't seem great.

Re: Who pays when startup employees keep their equity?

#50

Post by conistonwater » Tue, Jul 05, 2016, 6:24 PM UTC

shon wrote: post #31

It's interesting to see the popular response to this thread being one where people think employees are better off with salary over options. This seems crazy to me as I have watched many close friends cash out options from companies including Google, Yelp, Apple and Pandora and buy houses (some with cash), start companies, become investors and/or take long sabbaticals with the proceeds from their options. With salary…

Having a significant portion of your portfolio in options on one company, which also happens to be the company you work for, is overconcentrated. The usual (good) advice is that people should diversify their portfolio, and believing in your company is not a good reason to not do that. Maybe it'd help to think about it in reverse: if you had all your money in cash, would you then buy all those options in your company to get the same portfolio? (Note: perhaps you would, but it's generally considered to be a bad idea.)