Stock options are complicated • Hacker News Board

Re: Stock options are complicated

#21

Post by mahyarm » Mon, Mar 06, 2017, 9:19 PM UTC

LouisSayers wrote: post #9

I can't help but feel the system is highly rigged in favour of investors. Many countries have tax incentives for investors, but when it comes to people actually joining startups, investing their time and effort, then all you get is a tax bill - and mostly at a highly inconvenient time to pay it! It very much feels like the system is designed to keep the rich rich, and to put the working (wo)man in their place.

Some countries let you pay taxes on liquidation, others demand to be paid on receiving something, despite it being impossible to liquidate. The USA is the second kind of country with AMT, and that is the fundamental problem.

Re: Stock options are complicated

#22

Post by hkmurakami » Mon, Mar 06, 2017, 9:20 PM UTC

dkhenry wrote: post #14

Stock options are not complicated. Most people who look into the details of them will find them very plain and actually quite simple. The issue is you don't often deal with this area of finance so it looks foreign until you spend some time looking into the terms. Your options are a contract between you and the company for you to buy shares at a given price. If the value of the shares is worth more then you pay, the d…

Agreed. Takes maybe a few hours to understand the terms.

BUT, most technical folks are very uninformed about investing and finance in general. Many brilliant engineers at my previous employers were utterly confused about their options as well as their decision making after IPO.

So I think the difficulty also stems from a lack of development in financial acumen generally.

Re: Stock options are complicated

#23

Post by helper » Mon, Mar 06, 2017, 9:20 PM UTC

AMT and the 90 day limit on exercising after leaving a company are the main things that make options painful. There has been some movement in the industry to get away from the 90 day limit (by converting from ISOs to NSOs), but has there been any recent attempts to get the AMT rules changed for ISOs? Does anyone think the current AMT rules for stock options are fair? I'm curious how this is viewed by people outside the industry.

Re: Stock options are complicated

#24

Post by mahyarm » Mon, Mar 06, 2017, 9:20 PM UTC

beagle3 wrote: post #19

LouisSayers wrote: post #9

I can't help but feel the system is highly rigged in favour of investors. Many countries have tax incentives for investors, but when it comes to people actually joining startups, investing their time and effort, then all you get is a tax bill - and mostly at a highly inconvenient time to pay it! It very much feels like the system is designed to keep the rich rich, and to put the working (wo)man in their place.

The US is probably the worst in this respect, and I heard Canada is quite bad, but most of European tax systems follow the "pay taxes only when money comes your way" principle, which puts all investors on equal footing.

What is the trap / bad part in Canada?

Re: Stock options are complicated

#25

Post by hkmurakami » Mon, Mar 06, 2017, 9:21 PM UTC

mahyarm wrote: post #21

LouisSayers wrote: post #9

I can't help but feel the system is highly rigged in favour of investors. Many countries have tax incentives for investors, but when it comes to people actually joining startups, investing their time and effort, then all you get is a tax bill - and mostly at a highly inconvenient time to pay it! It very much feels like the system is designed to keep the rich rich, and to put the working (wo)man in their place.

Some countries let you pay taxes on liquidation, others demand to be paid on receiving something, despite it being impossible to liquidate. The USA is the second kind of country with AMT, and that is the fundamental problem.

One good thing that may come out of a Trump tax reform for startups is a repeal of the AMT.

Obviously rife with other consequences.

Re: Stock options are complicated

#26

Post by hkmurakami » Mon, Mar 06, 2017, 9:21 PM UTC

beagle3 wrote: post #19

LouisSayers wrote: post #9

I can't help but feel the system is highly rigged in favour of investors. Many countries have tax incentives for investors, but when it comes to people actually joining startups, investing their time and effort, then all you get is a tax bill - and mostly at a highly inconvenient time to pay it! It very much feels like the system is designed to keep the rich rich, and to put the working (wo)man in their place.

The US is probably the worst in this respect, and I heard Canada is quite bad, but most of European tax systems follow the "pay taxes only when money comes your way" principle, which puts all investors on equal footing.

In Japan you owe taxes when you vest options (not even exercise!!) Which is even worse.

Re: Stock options are complicated

#27

Post by mahyarm » Mon, Mar 06, 2017, 9:22 PM UTC

helper wrote: post #23

AMT and the 90 day limit on exercising after leaving a company are the main things that make options painful. There has been some movement in the industry to get away from the 90 day limit (by converting from ISOs to NSOs), but has there been any recent attempts to get the AMT rules changed for ISOs? Does anyone think the current AMT rules for stock options are fair? I'm curious how this is viewed by people outside t…

Supposedly getting rid of AMT is one of trumps campaign promises: http://www.investopedia.com/articles/taxes/010417/can-trump-...

Most people think AMT is a badly thought out disaster, but it brings in too much tax revenue and effects the upper middle class, so there isn't much sympathy / political capital for it. AMT also ignores state income tax deductions, which is pretty screwed up!

Re: Stock options are complicated

#28

Post by hkmurakami » Mon, Mar 06, 2017, 9:23 PM UTC

helper wrote: post #23

AMT and the 90 day limit on exercising after leaving a company are the main things that make options painful. There has been some movement in the industry to get away from the 90 day limit (by converting from ISOs to NSOs), but has there been any recent attempts to get the AMT rules changed for ISOs? Does anyone think the current AMT rules for stock options are fair? I'm curious how this is viewed by people outside t…

I'm curious how ISOs can be abused without the existence of AMT (which gets at the same question from a different angle). Maybe for executive compensation?

Re: Stock options are complicated

#29

Post by beagle3 » Mon, Mar 06, 2017, 9:25 PM UTC

epa wrote: post #11

chimeracoder wrote: post #10

Earlier quoted context omitted.

> Regarding stock options expiring 3 months after leaving the company, it doesn't have to be this way and a lot of startups are moving in the direction of 10 year exercise periods. This requires converting all options to NSOs, and the tax implications of NSOs are not pretty. (From a tax perspective, ISOs aren't great[0], but they're much better for employees, by design). [0] You have to pay AMT on the spread between…

The kicker here is that the option life is 10 years, even if you have left the company. So you can avoid tax by not exercising until you plan to sell. It becomes a personal choice between 1) do i want the option still, even if i quit, and 2) do i plan to have ownership in the company for a period longer than a year before i sell. Typically most people would prefer 1 over 2. Keep in mind for someone reading this comme…

The other thing to keep in mind is that stock options (especially those given to employees) tend to be much less protected than shares.

If you exercised, and another shareholder got unfair preferential treatment, you have reason to seek compensation or sue. If you haven't exercised yet, .... well ... not so much.

Also, many option contracts give you the right to buy X shares at price Y and do not make special consideration for stock splits - e.g. a 2:1 split would likely make your options worthless by halving the share price, and by halving the percentage of the company that X represents.

So, waiting to exercise until you sell is a very good strategy, except when it isn't - not very common, but you rarely get notified about these issues beforehand, especially if you are no longer involved with the company.

Re: Stock options are complicated

#30

Post by dkhenry » Mon, Mar 06, 2017, 9:25 PM UTC

hkmurakami wrote: post #22

dkhenry wrote: post #14

Stock options are not complicated. Most people who look into the details of them will find them very plain and actually quite simple. The issue is you don't often deal with this area of finance so it looks foreign until you spend some time looking into the terms. Your options are a contract between you and the company for you to buy shares at a given price. If the value of the shares is worth more then you pay, the d…

Agreed. Takes maybe a few hours to understand the terms. BUT, most technical folks are very uninformed about investing and finance in general. Many brilliant engineers at my previous employers were utterly confused about their options as well as their decision making after IPO. So I think the difficulty also stems from a lack of development in financial acumen generally.

+1 for development of financial acumen. We can often point to people taking out 18% APY car loans, or going to Payday loan vendors and say how silly they are for not understanding finance, but we turn a blind eye when its the finance that effects us ( even though one could argue that compounding interest on a payday loan is probably more complex then your basic stock option grant )