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

Re: House Passes Employee Stock Options Bill Aimed at Startups

#221

Post by nostrademons » Sat, Sep 24, 2016, 1:20 AM UTC

wyager wrote: post #210

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…

Maximizing the log of X is the same as maximizing X.

Well, he's suggesting maximizing the expected value, which is a little different. For example, a situation where you have a 10% chance of making $10M and a 90% chance of making zero has an expected value of $1M, but its expected value in log10 space is 0.7 = only about $5, while a 100% chance of making $100K has an expected value of $100K, but in log10 space = 5 = $100K.

I still quibble about the use of log for this purpose (and even if you do, what base?), but I see his point. A non-linear utility function penalizes low-chance but high-value outcomes.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#222

Post by harryh » Sat, Sep 24, 2016, 1:38 AM UTC

rlucas wrote: post #201

harryh wrote: post #24

Earlier quoted context omitted.

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…

> 2) The company ABSOLUTELY CANNOT offer stock options at a discount to the 409A. There is a good chance people would go to jail these days if they did that. Absolutely false. A company can create an option, a warrant, etc. with whatever kind of terms it likes, so long as the board approves and it's permitted by the applicable state law and charter. The only thing a 409(a) valuation does is provide a "safe harbor" fo…

OK ya, that's all fair. I overstated. I will amend my comment to say that if companies do offer options at a discount to the 409A everyone involved needs to be very very very careful about tax laws or bad things can happen to both the company and the option grantee.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#223

Post by chubot » Sat, Sep 24, 2016, 1:50 AM UTC

mrfusion wrote: post #130

chubot wrote: post #113

Earlier quoted context omitted.

I would check out sharespost, equityzen, or equidate (and also search for them on Hacker News, as I found others mention experience with sharespost). I don't have direct experience, but I was helping a friend with a number of shares in a late stage startup research the sell side, and those are the companies that came up. It crossed my mind to buy shares but I haven't done so. For some of them, you have to be an accre…

Thanks for the helpful answer. Do you need a lawyer or accountant when using one of those sites or is it all pretty standardized?

I don't know since I haven't used them yet. I imagine the middleman is fairly well aligned with you because their business model is to take a cut of the transaction. If they're getting 5% of a $100K or $500K transaction, that's a fairly good incentive not to try to screw people over. Disputes cost time and money.

The party that isn't aligned is the employer. As mentioned, they hold right of first refusal, and they may balk at having "strangers" on the cap table.

I'm sure there is a whole bunch of "interesting" paperwork and if you had a lawyer look at it they would gladly take your money. I believe each company is different, because the way you hold private shares depends on the company governance. SharesPost has presumably done some of the legwork for you because they are advertising this facilitation only for specific companies, which they have hopefully vetted in some way.

I imagine that SharesPost exists precisely because people had to get lawyers and accountants involved to do these custom transactions, and now they are pushing it to the lower end of the market. But they are also fairly new so they can't be perfect.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#224

Post by JumpCrisscross » Sat, Sep 24, 2016, 2:18 AM UTC

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..…

My "luxury" VC fund features investor meetings three times a day, with meals and drinks provided by top-rated chefs and bartenders. Hell, for a higher "management fee," we'll even let you stay at our "offices".

Re: House Passes Employee Stock Options Bill Aimed at Startups

#225

Post by nullc » Sat, Sep 24, 2016, 2:42 AM UTC

Perhaps I'm misreading the law, but it looks like it solves the wrong problem: It addresses a cash-flow issue rather than the tax liability issue.

Say you have options at FooCorp and you leave. FooCorp is illquid and you have 90 days to exercise your 10,000 options. Your FC options have a $5 strike, but the company currently has a 409a valuation of $100/share.

To exercise the options you would need to pay $50,000 to FooCorp, then you would have a "realized gain" 950k (($100-$5)*10000 which you would owe 28% of in taxes that year, or 266k. So you would need access to $316k in total in order to exercise these options.

Two issues arise: (1) You may not have $316k just kicking around. (2) THE SHARES ARE ILLIQUID AND MAY BE WORTH $0 WHEN YOU CAN ACTUALLY DO ANYTHING WITH THEM.

The bill appears to help with (1) by letting you pay that 266k not now-- but later when the company shares become liquid or 7 years (whichever comes first). But it does nothing about (2) -- you might exercise and then the company goes bust, and seven years later you owe $266k and your current position is worth -50k... and because the taxes are AMT, you can't meaningfully write them off your losses against the taxes you owe.

This kind of failure doesn't require FooCorp to fail. You could have options at $5, execute at $100, and have things go liquid at $7-- ignoring taxes this would have been a $20k gain. But with the taxes you're still $246k in the hole.

The issue all along wasn't that someone needed extra money. The issue was the potential huge losses. If it weren't risky you could find a lender to cover the execution price and taxes in exchange for a return when the asset becomes liquid. (E.g. having to pay the $266k up front but getting it returned later when the asset becomes worthless and you write it off)

If anything this makes the situation worse by encouraging more people to commit financial suicide by making it less obviously a bad idea while being just as risky as it always was.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#226

Post by rrrrsss99 » Sat, Sep 24, 2016, 3:33 AM UTC

ChicagoDave wrote: post #215

nostrademons wrote: post #144

Earlier quoted context omitted.

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 s…

I'd add that it's entirely optional for anyone to take any job and this includes a start-up. If you want a regular job with regular hours with regular stress levels, then please, don't even bother looking at entrepreneurial employment opportunities. But if you do, you might as well go all in and mix your salary with options, work your ass off for a couple of years, learn as much as you can, build a network, and then…

I think this is kind of an unrealistic view of startups that's been championed a lot. I'll concede that I only have 4 data points (4 jobs), but when I worked at a startup, my responsibilities were much more limited and defined than where I am now (200+ people, 80 IT). A lot of that was due to cycling through management styles like scrum and kanban, but this is to be expected at startups that haven't figured out what works for them yet and want to copy everyone else. I also think I've learned a lot more at my current company than at my startup where I was surrounded by "fake it to you make it" people. I value the network I've built up there more too. Before you jump into that circus, look at the middle. It's not startup or 5000 person company. There are plenty of established companies in the 50 - 300 person range that are nice places to work and to learn and pay market rates. I was able to jump into trading from there and get 2-3x market rates

Re: House Passes Employee Stock Options Bill Aimed at Startups

#227

Post by rrrrsss99 » Sat, Sep 24, 2016, 3:55 AM UTC

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…

What about the alternative of building up wealth? It's the conservative view, but if you get to 30 or 40 with significant assets, you have a lot more flexibility to explore what you want without worrying about money. With the supply demand curve favoring devs for the time being, why not jump from job to job taking the compensation increase each time? I think my 2-3 year stints will catch up to me at some point, but if I have 1-2m in liquid assets, I think I'll have a much wider set of means than if I had optimized for experience. You'll still fail and learn, but you'll be sitting on cash instead of worthless options

Re: House Passes Employee Stock Options Bill Aimed at Startups

#228

Post by crazy2be » Sat, Sep 24, 2016, 6:15 AM UTC

st3v3r wrote: post #151

dragonwriter wrote: post #131

Earlier quoted context omitted.

> So a really bad tax rule is in place, but since it happens to bring in ~$100M/yr, we shouldn't fix the rule? Assuming, for the sake of argument, agreement that the rule is bad, fixing it without paying the cost at the same time may still be worse.

While true, on the scale of the federal government, $1 billion is pretty trivial.

For reference, the US Federal budget in 2015 was 3.7 trillion dollars. [1]

[1] https://en.wikipedia.org/wiki/United_States_federal_budget

Re: House Passes Employee Stock Options Bill Aimed at Startups

#229

Post by wyager » Sat, Sep 24, 2016, 5:02 PM UTC

nostrademons wrote: post #221

wyager wrote: post #210

Earlier quoted context omitted.

Maximizing the log of X is the same as maximizing X.

Well, he's suggesting maximizing the expected value, which is a little different. For example, a situation where you have a 10% chance of making $10M and a 90% chance of making zero has an expected value of $1M, but its expected value in log10 space is 0.7 = only about $5, while a 100% chance of making $100K has an expected value of $100K, but in log10 space = 5 = $100K. I still quibble about the use of log for this…

The most general (correct) form of this statement is "use the expectimax algorithm". Yeah, it's a bit weird that he's prescribing log as the mapping from dollars to utility.

If log is the correct mapping for you, it actually doesn't matter what base you use. It just comes out as a constant factor on the expected utility.

Sum_d P(d) U(d) = Sum_d P(d) log_b(d) = Sum_d P(d) log(d)/log(b) = (1/log(b)) Sum_d P(d) log(d)

Re: House Passes Employee Stock Options Bill Aimed at Startups

#230

Post by overdrivetg » Sun, Sep 25, 2016, 12:14 AM UTC

beagle3 wrote: post #63

jimbokun wrote: post #28

Earlier quoted context omitted.

True, but is it the IRS' fault if the corporation refuses to create a market for their shares? If the IRS didn't tax these shares, it would quickly become a tax shelter of epic proportions, no?

No. But it isn't the individual's fault either. And it IS the IRS' fault for taxing an illiquid asset as if it were liquid. The only way that this sort of makes sense is if you can pay your tax in illiquid assets - e.g. If you can pay your tax with the same shares. The most logical tax code I know can be summarized as: no basis step-up except on an event when taxes are paid; taxes are paid whenever (and only if) some…

I can't upvote this enough. If the IRS is ascribing value X to stock options I can't liquidate, I should be able to pay my tax in the form of those options at whatever value I am being taxed on them.

Of course, the devil's in the details as you probably don't want the government having voting shares in a bunch of private companies either... Maybe they just get a blanket clause to automatically exercise and sell as part of any IPO offering or something?

This could have a double-down effect too as the government owns more illiquid stock and feels firsthand the pain of regulations (SarbOx anyone??) that result in fewer IPOs / longer time horizons to liquidity.

Oh your revenue is going down because you've regulated companies out of the IPO market? Great, looks like time to get off your ass and actually FIX THE PROBLEM. C'mon guys.