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Who pays when startup employees keep their equity?

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Re: Who pays when startup employees keep their equity?

#191

Post by sokoloff »

harryh wrote: post #161
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…

This is wrong. RSUs are not taxable at the time of vesting.

Citation, please?

Most of the time, RSUs are taxable at the time of vesting, as most plans vest and release the shares simultaneously.

Re: Who pays when startup employees keep their equity?

#192

Post by sokoloff »

infinite8s wrote: post #149
dohertyjf wrote: post #33

Earlier quoted context omitted.

I value stock options at zero . There is potentially a huge upside if you are an early employee at a company that gets enormous. Even then, you have to be top 20 or 30 to get f-you money, and even then it might not even be that. I had stock options (not RSUs) at BigCo where I worked for 2 years. At one point, had I been fully vested, I was sitting on about $240k worth of stock. After a 3x1 split and the company going…

Do option counts not change as a result of a split?

Routine corporate actions will adjust the option count and strike price equitably. (A 2:1 split will typically double the number of option shares and halve the exercise price.)

Re: Who pays when startup employees keep their equity?

#193

Post by usaar333 »

akkartik wrote: post #75
cloudjacker wrote: post #44

Earlier quoted context omitted.

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

Grandparent was talking about AMT, which is still a valid concern even with RSU withholding.

How? RSUs are taxed at ordinary tax rates when they settle, which is higher than AMT.

Do you have an example where someone's AMT would be higher with RSUs than ordinary taxes?

Re: Who pays when startup employees keep their equity?

#194

Post by usaar333 »

sokoloff wrote: post #191
harryh wrote: post #161

Earlier quoted context omitted.

This is wrong. RSUs are not taxable at the time of vesting.

Citation, please? Most of the time, RSUs are taxable at the time of vesting, as most plans vest and release the shares simultaneously.

That depends on the plan. Plenty of private companies don't release the shares as they vest. Larger ones - and public ones - generally will though.

Re: Who pays when startup employees keep their equity?

#195

Post by usaar333 »

timcederman wrote: post #72
cloudjacker wrote: post #44

Earlier quoted context omitted.

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

In this case they are still withholding, but the withholding doesn't cover enough because of AMT and other reasons.

When has this failed? FB for instance withheld at nearly 45% (http://dealbook.nytimes.com/2012/09/10/why-facebook-is-payin... is this not enough or are some companies underwithholding?

Re: Who pays when startup employees keep their equity?

#196

Post by akkartik »

usaar333 wrote: post #193
akkartik wrote: post #75

Earlier quoted context omitted.

Grandparent was talking about AMT, which is still a valid concern even with RSU withholding.

How? RSUs are taxed at ordinary tax rates when they settle, which is higher than AMT. Do you have an example where someone's AMT would be higher with RSUs than ordinary taxes?

My admittedly neophyte understanding is that a) RSUs are counted as income, b) if income exceeds some threshold the entirety of it is subject to a higher AMT rate.

Without AMT, if you got stock and paid taxes in stock, you wouldn't care about the effect on taxes if the stock price later tanked. With AMT, however, you get screwed.

Re: Who pays when startup employees keep their equity?

#197

Post by harryh »

sokoloff wrote: post #191
harryh wrote: post #161

Earlier quoted context omitted.

This is wrong. RSUs are not taxable at the time of vesting.

Citation, please? Most of the time, RSUs are taxable at the time of vesting, as most plans vest and release the shares simultaneously.

Ya, what usaar333 said. I was talking about what is typical for private companies. Shares are generally held by the company until a liquidity event so that employees don't have a taxable event.

Re: Who pays when startup employees keep their equity?

#198

Post by wyman »

chollida1 wrote: post #3

There was a PE firm that came around about 4-5 years ago trying to raise money on this very premise. Their thesis was that - startups would remain private longer. - employee's lost their options when they leave - longer periods to go public means more employees return options to the pool which means employee option pools can be smaller - longer private periods leads to more rounds raised which benefits investors over…

Where are all these secondary market companies "arbing" it out on employee stock option liquidity? The market should be HUGE, both for locked-in employees, and for buyers who want a small discount on hot startups.

This would totally solve the 90-day exercise period problem for the employees, without requiring company goodwill.

Some companies like ESOFund, 137 Ventures, EquityZen can do deals without company involvement, with a non-recourse loan with limited upside/downside, or a forward contract with cash delivered today, and the certificate held as collateral until IPO, when it is transferred.

There are increasingly share restrictions (which some consider unenforceable) on sales/transfers, loans, etc. First-hand knowledge online is scarce and lawyers give unclear answers due to the novelty of these deals. Can the company find out? Intervene? Sue? Are they likely to? Do we need a public case and TechCrunch headline in order to find out what the outcome is? How different is self-financing vs. a rich relative vs. angel vs. a marketplace investor?

Ask HN thread: https://news.ycombinator.com/item?id=12034716

Edit: It seems like I misunderstood, and the investors are investing in the company itself, not buying employee shares on the secondary market. The major point still stands though.

Re: Who pays when startup employees keep their equity?

#199

Post by usaar333 »

akkartik wrote: post #196
usaar333 wrote: post #193

Earlier quoted context omitted.

How? RSUs are taxed at ordinary tax rates when they settle, which is higher than AMT. Do you have an example where someone's AMT would be higher with RSUs than ordinary taxes?

My admittedly neophyte understanding is that a) RSUs are counted as income, b) if income exceeds some threshold the entirety of it is subject to a higher AMT rate. Without AMT, if you got stock and paid taxes in stock, you wouldn't care about the effect on taxes if the stock price later tanked. With AMT, however, you get screwed.

AMT (28%) is lower than ordinary marginal rates (35%+).

What you may be thinking about is how some classes of income, like ISOs are treated differently under AMT than under the ordinary code: http://www.taxprophet.com/archives/Stock_Options_0306/ISO%20... http://www.taxprophet.com/archives/Stock_Options_0306/ISO%20... e.g. ISO exercise is not taxed under ordinary income, but is under AMT. Meaning your taxable income could be way higher under AMT, meaning even with the lower AMT rate, you still ended up owing more under AMT than regular.

However, I am unaware of a similar problem existing for RSUs. AFAIK, they are treated the same for AMT and the ordinary system meaning they shouldn't ever "push you into AMT"

Re: Who pays when startup employees keep their equity?

#200

Post by wyman »

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…

Absolutely agree. ISOs should also be taxed on liquidity as well, instead of an AMT on exercise. There was a group, ReformAMT.org, opened in the wake of the 2000 tech crash, where many employees ended up owing massive amounts of AMT on now-devalued stock.

However, it seems that the employers' and investors' interests are against the employees' here - the investors want what few employee shares are lost to be returned so they are diluted less, employers want holden handcuffs to reduce mobility, and only the much-weaker at lobbying employees want more freedom/mobility.

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