House Passes Employee Stock Options Bill Aimed at Startups • Hacker News Board

Re: House Passes Employee Stock Options Bill Aimed at Startups

#141

Post by harryh » Fri, Sep 23, 2016, 5:52 PM UTC

iaw wrote: post #95

matt_wulfeck wrote: post #57

> Only startups offering stock options to at least 80 percent of their workforce would be eligible for tax deferrals, and a company’s highest-paid executives would not be able to defer taxes on their stock under the legislation. I understand the desire to avoid a regressive taxation system, but why is it that every tax rule we create comes with 2x the amount of caveats and rules? Our tax system is becoming a mess. At…

I agree that there's too much added complexity in the tax-code but do you really feel that this requirement is that onerous? The likely motivation being being in line with those around 401k account requirements: if a company uses this, it should be to the benefits of the employees and not just the executive staff.

The 401k rules are awful and incentive giving benefits (matching) that are more valuable to richer employees than poorer ones. It's insane.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#142

Post by SilasX » Fri, Sep 23, 2016, 5:53 PM UTC

st3v3r wrote: post #140

SilasX wrote: post #132

Earlier quoted context omitted.

401ks are itself a convoluted mess. They should just say, "hey, if you work, you can invest it tax-deductible and tax-deferred". The current system is, "if you work, then you should be able to participate in your caricatured, mustache-twirling, ultra-rich boss's tax-deferred plan, in accordance with all these rules and exceptions that clumsily try to make him share his bottomless wealth with you."

"They should just say, "hey, if you work, you can invest it tax-deductible and tax-deferred"." That's called an IRA.

Except that, if your employer offers a 401k at all, you lose the tax deduction benefits (if income over 70k). And the contribution limits are much lower.

http://www.fool.com/retirement/ira-vs-401k-which-is-better-f...

Re: House Passes Employee Stock Options Bill Aimed at Startups

#143

Post by arcticfox » Fri, Sep 23, 2016, 5:59 PM UTC

yaur wrote: post #123

grellas wrote: post #100

The original point of ISOs was to offer to employees the opportunity to take an economic risk with stock options (by exercising and paying for the stock at the bargain price) while avoiding the tax risk (by generally not recognizing ordinary income from that exercise and being taxed only at the time the stock was sold, and then only as a capital gains tax). AMT has since emerged to devour the value of this benefit. B…

> This "tax breather" is a positive step I'm really not sure that's true. Its usually a bad idea to take stock options instead of a market rate salary because most options are worthless in the long run. Lots of people do it anyway because they have a fantasy about making it big. As it stands now this is a life lesson that people spend some time in their 20s figuring out and probably walk away with nothing but some va…

Citation / reference on most options being worthless? I feel that most companies that make it to that stage pan out beyond being worthless. I must be missing something, since I'm not that familiar with how options in startups work.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#144

Post by nostrademons » Fri, Sep 23, 2016, 6:01 PM UTC

yaur wrote: post #123

grellas wrote: post #100

The original point of ISOs was to offer to employees the opportunity to take an economic risk with stock options (by exercising and paying for the stock at the bargain price) while avoiding the tax risk (by generally not recognizing ordinary income from that exercise and being taxed only at the time the stock was sold, and then only as a capital gains tax). AMT has since emerged to devour the value of this benefit. B…

> This "tax breather" is a positive step I'm really not sure that's true. Its usually a bad idea to take stock options instead of a market rate salary because most options are worthless in the long run. Lots of people do it anyway because they have a fantasy about making it big. As it stands now this is a life lesson that people spend some time in their 20s figuring out and probably walk away with nothing but some va…

This is the current meme on Hacker News, but IMHO the pendulum has swung too far.

You should absolutely be very careful about working for an early-stage startup as an employee and taking options or equity in lieu of part of your salary. You should feel that you trust the founders. You should insist that they've figured out a.) who their customers are b.) why they want the product and c.) how to make money, and have some concrete evidence that the customers do in fact want the product. You should ask about the cap table, and liquidation preferences, and anticipated future dilution, and know what percentage of the company you'll own and how much you'll make under a variety of exit scenarios.

But if the numbers look good and you have solid evidence that people want the company's product, oftentimes taking more equity is the right move. Equity aligns your incentives with the company and ensures that if it does well, you do well. Under capitalism, taking cash is a loser's bargain, not in the sense that you always make less money (you often make more), but in the sense that cash dominates equity only if you've picked a losing organization. To the extent that most organizations lose, this can be rational, but to the extent that you're an independent economic actor trying to maximize your returns, it's often worth putting in the research to try and maximize your chance of picking a winner, particularly given the other career benefits of having a hot startup on your resume.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#145

Post by mavelikara » Fri, Sep 23, 2016, 6:04 PM UTC

grellas wrote: post #100

The original point of ISOs was to offer to employees the opportunity to take an economic risk with stock options (by exercising and paying for the stock at the bargain price) while avoiding the tax risk (by generally not recognizing ordinary income from that exercise and being taxed only at the time the stock was sold, and then only as a capital gains tax). AMT has since emerged to devour the value of this benefit. B…

When a new round is raised, the price paid by the investor gets her a preferred share. How does one compute the FMV of common stock compared to this? Specifically, are there any regulations regarding the max discount that can be applied to the price paid by the last investor to get the FMV of the common stock?

I recently came across a case where the FMV of common stock was only few %ge points less than what the last investor paid. But the investor was rumored in the press to have gotten significant privileges (a ratchet) for that price. So I was surprised that the prices were so close. Does anyone know why that could be so?

Re: House Passes Employee Stock Options Bill Aimed at Startups

#146

Post by stale2002 » Fri, Sep 23, 2016, 6:06 PM UTC

whamlastxmas wrote: post #49

revo13 wrote: post #46

More evidence as to why the income tax should be replaced with a consumption tax. Just let people make their dammed money already and apply a simple tax when they spend it. Windfalls wouldn't be "dangerous" or punitive in that model, and savers would be rewarded. --Of course I oversimplify the consumption tax, and safeguard would need to be in place on that to ensure it is not regressive with respect to necessities..…

High consumption tax creates an incentive to not spend your money, which is bad.This also means the millionaires and billionaires of the world get to invest their money tax-free to earn even more money, often with rent-seeking, while 95% of America is getting taxed essentially up front on the vas majority of their earnings because it gets spent on stuff like housing, food, and healthcare. This creates a massively reg…

If people don't spend their money that is wonderful!

They did a whole bunch of useful works and in exchange accepted a bunch of green pieces of paper for that work!

They never consumed any resources, just ones and zeros in a computer.

Instead of paying 40 percent in taxes, they paid 100 percent!

Re: House Passes Employee Stock Options Bill Aimed at Startups

#147

Post by nostrademons » Fri, Sep 23, 2016, 6:07 PM UTC

arrosenberg wrote: post #134

tyleraldrich wrote: post #106

Earlier quoted context omitted.

Intuit is a pretty funny company. They try to make TurboTax as simple as possible for the average American (most Americans can fill out a 1040EZ and be done in minutes), but at the same time try to make taxes as complicated as possible so that they can sell services around that. It's both smart and infuriating .

Intuit's position isn't necessarily pro-complexity, they'd actually prefer the tax code simplified somewhat, because they'd need far fewer employees to update the tax code information in the software every year. The lobbying is to keep the IRS from A) releasing free 1040EZ/A software and B) keep the IRS from simplifying even further and just sending you a bill, like HMRC does.

It's somewhat infuriating that the IRS doesn't just send you a bill. It has full data on every form you put into TurboTax. It runs its own calculations independently and checks them against your return. It has full knowledge of the tax code. If you disagree with it, the IRS just tacks on penalties & interest and eventually garnishes your wages. Why not just send a bill?

Re: House Passes Employee Stock Options Bill Aimed at Startups

#148

Post by grellas » Fri, Sep 23, 2016, 6:09 PM UTC

dllthomas wrote: post #138

yaur wrote: post #123

Earlier quoted context omitted.

> This "tax breather" is a positive step I'm really not sure that's true. Its usually a bad idea to take stock options instead of a market rate salary because most options are worthless in the long run. Lots of people do it anyway because they have a fantasy about making it big. As it stands now this is a life lesson that people spend some time in their 20s figuring out and probably walk away with nothing but some va…

If the company goes bust before you get liquid, isn't that a loss commensurate with your gain that could be used to offset it?

No, you realize ordinary income tax on the spread, which is payable in full in the year realized (or in the year to which it is deferred under this measure) while the loss of the stock value is a capital loss, which can only be offset against other capital gains or deducted at the rate of $3,000 per year. So you could easily have a situation in which you realize tens or hundreds of thousands in ordinary income on which you must pay tax and have only the ability to deduct $3,000/yr against that income, i.e., a tax disaster.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#149

Post by gshulegaard » Fri, Sep 23, 2016, 6:11 PM UTC

harryh wrote: post #24

gshulegaard wrote: post #11

Earlier quoted context omitted.

To be perfectly honest, this bill affects mostly middle class near as I can tell. The following is entirely personal understanding of my own stock option agreement and is subject to mistakes and misconceptions...so someone can feel free to correct me. The problem this bill targets is the "exercise tax" interaction. Say you are an employee at a start up. Said start up can't afford your full normal salary so they pay y…

You have the gist right but a couple of corrections: 1) The board doesn't set the price arbitrarily. They engage a 3rd party accounting firm to do a 409A evaluation of the company. The 3rd party essentially sets the price. It's true that determining a market price for private company stock is just as much art as science but it's not completely arbitrary. 2) The company ABSOLUTELY CANNOT offer stock options at a disco…

See I knew there would be someone else on here who knew better :)

Anyway, my only elaboration on point 4 and 5 is that most options agreements have vesting ~~terms~~ schedules (and they typically include 1-year cliffs). So even under ideal conditions you will have to wait a certain amount of time before exercising.

But thanks for taking the time to add additional details!

Re: House Passes Employee Stock Options Bill Aimed at Startups

#150

Post by gshulegaard » Fri, Sep 23, 2016, 6:12 PM UTC

goseeastarwar wrote: post #31

gshulegaard wrote: post #11

Earlier quoted context omitted.

To be perfectly honest, this bill affects mostly middle class near as I can tell. The following is entirely personal understanding of my own stock option agreement and is subject to mistakes and misconceptions...so someone can feel free to correct me. The problem this bill targets is the "exercise tax" interaction. Say you are an employee at a start up. Said start up can't afford your full normal salary so they pay y…

409A isn't an arbitrary number the board makes up. Private co's pay external firms to do market research and sift through internal financial/key metrics to derive that number. Your scenario of an immediate $.30 tax liability because of an arbitrary discount also isn't correct. 409A is recalculated on some interval (quarterly generally) and those price changes determine your stock's new value and subsequent tax liabil…

Sounds about right! Thanks for taking the time to provide additional details.

Cheers!