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House Passes Employee Stock Options Bill Aimed at Startups

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Re: House Passes Employee Stock Options Bill Aimed at Startups

#191

Post by benmathes »

nostrademons wrote: post #168
btilly wrote: post #167

Earlier quoted context omitted.

I disagree. The optimal long term strategy for managing a portfolio of independent investments is to always pick a mix that maximizes the expected value of the log of your net worth. This leads to a more conservative investment strategy than the naive "maximize your expected value", and explains such things as why money-losing investments into buying insurance can be a really good idea. In general this is probably no…

Why log? I get that your utility function from money is non-linear, but I would expect a more accurate model to be a step-function, with large steps at "out of debt", "can tell a bad boss sayonara", "can buy a house", "can pay for kids' college eduaction", and "never have to work again". Equity payouts from a typical startup exit often line up nicely with the middle three, and if you hit the Google/Facebook jackpot,…

yeah, log is largely just a cute approximation of that stepwise reality.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#192

Post by kspaans »

throwaway2016a wrote: post #109
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…

I'm at a startup and haven't exercised for this exact reason I was hoping this was to fix that. It's unclear to me that if I defer it and the company goes out of business before then, does that mean I pay no taxes? And if the price goes up do I pay capital gains or income tax on the difference in value between now and what it went up to? What about the difference between now and my excise price.

In my unprofessional opinion you need to know at least two things to get an idea of whether or not you will owe taxes when you exercise: 1) the strike price you pay to exercise your options, 2) the current fair market value (FMV) of the stock

You will only run into this AMT trap if there is a difference between 1 and 2. This could happen if you were granted options a long time ago and your company has since raised new rounds which increased the valuation. This is when the IRS eyes your exercized options as 'income' unlike the normal case with ISOs where the strike price and FMV are pretty close.

EDIT: see this excellent post elsewhere in this discussion: https://news.ycombinator.com/item?id=12565340

Re: House Passes Employee Stock Options Bill Aimed at Startups

#193

Post by hughes »

calcsam wrote: post #116
harryh wrote: post #86

Earlier quoted context omitted.

Your statement about RSUs is wrong. They are specifically designed to avoid an immediate tax hit.

RSUs are immediately taxable upon vesting. Companies often cover this, but it's at the discretion of the company.

I've only ever heard of companies offering to withhold enough shares to cover the tax obligation. Is that what you mean, or do you really mean giving the employee an additional cash bonus to cover the taxes?

Re: House Passes Employee Stock Options Bill Aimed at Startups

#195

Post by jnordwick »

encoderer wrote: post #186
jnordwick wrote: post #158

Earlier quoted context omitted.

1- I don't know how exactly AMT liability interacts with the capital loss carry over 2- Almost nobody hits the AMT jackpot year after year. 3- Ask your CPA and California's tax system is one of the worst in the country. They keep milking that SV cash cow year after year, and it is drying up but they don't seem to care :)

A lot of people in California (and NY, NJ, etc) hit AMT every year. Two incomes, with very large deductions for state income tax, mortgage interest, and property taxes paid.

So I have to choose between a wife and a house? Eek... I guess I can always just get a dog. Sadly, I say that only half jokingly.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#196

Post by kspaans »

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..…

Interesting idea about a progessive consumption tax. But would it be more costly to collect than income tax? Not to suggest that it isn't worth the cost: consider sales tax vs VAT. VAT is more expensive to collect but harder for businesses to evade.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#197

Post by lifeisstillgood »

nostrademons wrote: post #185
in_cahoots wrote: post #180

Earlier quoted context omitted.

Honest question: do you think you could have chosen that companies were not "losing bargains" seven years ago? How many companies are there today that you think would grant you significant equity and also will reach liquidity in the next seven years? How would this change if you were an early twenty-something with few connections and little savings? Off the top of my head I can only think of a handful of companies to…

Obviously I didn't choose right - the first two startups I worked for both failed. And then I was like "Never again" - I was the voice on HN saying that early employees get screwed, c. 2008 - and that blanket prohibition made me miss out on being employee #2 at DropBox (along with 10 or so other startups that went nowhere). More to the point, though - I don't think that the point of a career should be to minimize ris…

>> If you've never failed at something or gotten screwed over when you're 40, you're probably about to start, and your failures will be much more visible, painful, and harder to recover from than if you fail when you're 22.

Really good advice. Which at 40 I will now ignore ;-)

Re: House Passes Employee Stock Options Bill Aimed at Startups

#198

Post by sedachv »

nostrademons wrote: post #168
btilly wrote: post #167

Earlier quoted context omitted.

I disagree. The optimal long term strategy for managing a portfolio of independent investments is to always pick a mix that maximizes the expected value of the log of your net worth. This leads to a more conservative investment strategy than the naive "maximize your expected value", and explains such things as why money-losing investments into buying insurance can be a really good idea. In general this is probably no…

Why log? I get that your utility function from money is non-linear, but I would expect a more accurate model to be a step-function, with large steps at "out of debt", "can tell a bad boss sayonara", "can buy a house", "can pay for kids' college eduaction", and "never have to work again". Equity payouts from a typical startup exit often line up nicely with the middle three, and if you hit the Google/Facebook jackpot,…

> I get that your utility function from money is non-linear, but I would expect a more accurate model to be a step-function

I think you just answered your own questions - log is continuous.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#199

Post by nostrademons »

sedachv wrote: post #198
nostrademons wrote: post #168

Earlier quoted context omitted.

Why log? I get that your utility function from money is non-linear, but I would expect a more accurate model to be a step-function, with large steps at "out of debt", "can tell a bad boss sayonara", "can buy a house", "can pay for kids' college eduaction", and "never have to work again". Equity payouts from a typical startup exit often line up nicely with the middle three, and if you hit the Google/Facebook jackpot,…

> I get that your utility function from money is non-linear, but I would expect a more accurate model to be a step-function I think you just answered your own questions - log is continuous.

Your utility function doesn't have to be continuous for you to maximize it, though.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#200

Post by linkregister »

calcsam wrote: post #82

This is amazing news. Some context: It's quite common to owe taxes today for gains on the value of your stock -- which is an illiquid asset you can't sell. This puts employees in the position of shelling out cash to keep something that rightfully belongs to them, or simply abandoning it (failing to exercise) when they leave the company. This bill would defer taxes on gains up to 7 years, or until the company goes pub…

A typical structure for RSUs (Uber included) is to delay activation until liquidity is possible. Until then, a contractual obligation to deliver the RSUs is what the employee actually possesses (after vest). Employees are free to exercise RSUs and pay the income tax hit, but I can't imagine a scenario when that would be rational. Especially since the company holds vested RSUs for separated employees.

Nobody at Uber is having to sell their Tesla P80 to cover the tax from their newly-vested RSUs after their annual cliff occurs.

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