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Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation

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Re: Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation

#81

Post by giobox »

seattle_spring wrote: post #79
loeg wrote: post #68

At least at my employer, the deferred compensation plan is only offered to high-level management employees ("Director" and above). So this doesn't seem to be a great loss for the average engineer. If other people who are individual contributors, or even low level managers, have access to an employer deferred compensation plan (different from my experience), I would love to hear about it. (As a highly paid engineer, I…

I've literally never heard of a tech company not offering deferred compensation (either stock options or RSUs).

Its not _that_ uncommon for an engineer not to receive options/RSUs. Sure it happens a lot in this industry, but it's not a hard and fast rule, especially once you leave Silicon Valley. I've certainly seen the "Director and above" approach mentioned earlier several times as well.

Re: Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation

#82

Post by perfectstorm »

hkmurakami wrote: post #2

Overall I think average comp full time employees at eaely stage startups will be a big beneficiary. They won't hit the exercise threshold, AMT will be gone, and ISO tax benefits and 409A valuation will remain. One problem I see is that the extended exercises that are popular these days convert from ISO to NQOs, so I wonder what that treatment will be like. Contractors lose some flexibility over NQOs, but imho they we…

> AMT will be gone

Trump is doing this to help himself. I read somewhere that he got hit pretty bad on AMT recently.

Re: Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation

#83

Post by seattle_spring »

s73ver_ wrote: post #32

Oh come on. The absolute last thing we need are more things making it harder for people to keep the options they earned after leaving the company.

You're right! Which is why getting rid of AMT will actually make it significantly easier.

Re: Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation

#84

Post by readams »

gonehome wrote: post #61
paulsutter wrote: post #3

Since most ISOs permit early-exercise, isn't this a moot point? (if a given ISO permits exercise upon issue, since the value of a newly issued ISO must be zero, then this $100K cap is not an issue?) > In particular, under the current tax rules, the total aggregate fair value of ISOs that become exercisable for an individual employee for the first time within a calendar year may not exceed $100,000. ISOs that fail to…

A lot of larger private companies don't allow early exercise (and even if they did the strike price is often pretty high anyway). The "become exercisable" language is ambiguous to me. If you have ISOs that became exercisable in one year that at the time were less than 100k, but you didn't exercise them and they're now worth more than that they still remain ISOs right? Would you still hit the 100k limit when you tried…

Early exercise only works with non-qualified options. They work by granting non-qualified options that you exercise immediately, but then have a claw-back provision that mirrors the vesting schedule of qualified options. Nothing here prevents that arrangement, but it might become less needed since the repeal of AMT removes much of the incentive to early exercise.

Re: Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation

#85

Post by drfuchs »

jdavis703 wrote: post #74
paulsutter wrote: post #64

Earlier quoted context omitted.

I would never work for a company that doesn't allow early exercise. Whether or not you plan to do it, you have to wonder about the attitude of those in charge if they don't allow early exercise.

Allowing early exercise is a legal and accounting headache. Many small startups have a hard time even getting stock option agreements to employees. When you're new, small, and possibly don't even have an HR person you can't really spend time on frivolous things like early exercise.

Not sure where you’re getting the idea that it’s a hassle to offer early exercise. The 4-person company I joined back when offered early-exercise without my even asking, and it was a huge win: I just had to risk a few thousand dollars (since the valuation was low), and it meant I wasn’t forced to later exercise and sell (in order to cover taxes) as they vested, or reached the end of their exercisabilty, or when the company went public, or when it later got bought out by a bigger public company, or even when I left their employment. Instead, I got to decide when to cash in and owe taxes. But you have to be a pretty early employee for this to work well, and not require a big cash outlay up front.

Re: Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation

#86

Post by ghaff »

sokoloff wrote: post #66
greenleafjacob wrote: post #41

Earlier quoted context omitted.

If you have itemized before and no material changes have occurred in your tax situation then you don’t have to itemize again.

> If you have itemized before and no material changes have occurred in your tax situation then you don’t have to itemize again. Explain this a bit more? I mean, it's technically true for most taxpayers that they aren't forced to itemize, but I doubt that's what you meant.

I think several people on this thread as using "itemized" as shorthand for "did the paperwork to figure out their total deductions and discovered it was less than the standard deduction."

Re: Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation

#87

Post by hedora »

dpiers wrote: post #24
morgante wrote: post #14

Earlier quoted context omitted.

Why do you assume average employees won't hit the cap? $100k isn't exactly a massive sum in tech.

ISOs are priced at the 409a value, which can be 1/10th of the preferred share price. Generally speaking, the 409a value converges with the preferred price as the company is de-risked and moves closer to IPO.

The caps are based on the value of the ISO when it vests, not when it is granted. If you exceed the $100K limit, then the options revert to NQs (and would presumably be subject to retroactive withholding, under the new rules).

This will hit companies that are within a few years of IPO particularly hard, since right now, they can use stock incentives as a significant recruitment tool, and large, unknown, multipliers between grant price and vesting prices are the norm.

Put another way, this will cripple the hiring ability of companies attempting to grow from $100M to $1B valuations, and make it much more likely for them to exit via acquisition instead of via IPO.

This significantly reduces the incentives established companies will have to innovate, and is a classic example of regulatory capture.

(Also, other parts of this tax plan will significantly increase taxes for students; especially graduate students, and also people that live in tech hubs like CA and NY. It is an overt attack against startups and other portions of the economy that have created most of the economic growth in the US over the last two decades.)

Re: Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation

#88

Post by hedora »

PrgsvThgt wrote: post #67

Personally happy to see that the new tax code appears to reduce the inequality between staff and executives, with regard to compensation and taxation. I'm a strong advocate for leveling the playing field for EVERYONE; because it eliminates (or reduces to the extent possible) the ability to negotiate these special options for "deferred" compensation.... for which the vast majority of us will never qualify.

This doesn't do that at all. It punishes employees 100-1000 of late stage startups with unknown, perhaps bankrupting retroactive taxes. The entire 409a system was designed to protect exactly that group of employee after the dot-com crash, and this undoes it.

Founders and execs likely will be fully vested before their options are worth anything at all (figure 8 years from founding to IPO, 4 years to vest).

Re: Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation

#89

Post by CalChris »

mempko wrote: post #78
CalChris wrote: post #35

Earlier quoted context omitted.

> These are relatively modest tax cut bills arriving at a time where the economy is growing and deficits are shrinking, which is exactly where you'd want them. So you want to cut taxes and increase deficits during growth times? This is, of course, not just different but exactly the opposite of Keynesianism. What is it that you plan to do during recessions? Cut spending and increase taxes to close your deficit? This i…

Deficits are always necessary. The size of the deficit needs to very. Since we are nowhere near full productive capacity, there is no danger in too many dollars chasing too few resources. The deficit needs to be reduced when economy is at full capacity to avoid inflation.

Saying that deficits are always necessary does not absolve the cut taxes and increase deficits during growth times nonsense.

Cutting taxes and increasing deficits during good times is just populist feel goodism. Yes, it's easy to cut taxes and it's easy to increase spending. Heck, trickle down even says this will increase tax revenues (except that we've tried that and it doesn't.) But not to worry because the people who are responsible for the mess will not have to clean up the mess. No, this doesn't work. We've tried it and it doesn't work.

Keynesianism is a quite conservative approach, actually.

Re: Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation

#90

Post by loeg »

seattle_spring wrote: post #79
loeg wrote: post #68

At least at my employer, the deferred compensation plan is only offered to high-level management employees ("Director" and above). So this doesn't seem to be a great loss for the average engineer. If other people who are individual contributors, or even low level managers, have access to an employer deferred compensation plan (different from my experience), I would love to hear about it. (As a highly paid engineer, I…

I've literally never heard of a tech company not offering deferred compensation (either stock options or RSUs).

RSUs aren't elective deferred compensation. They're just income at the time of vest. ISOs are a little weirder. Nevertheless, neither is what I'm talking about.

Traditional 401(k)s are a type of qualified deferred compensation plan and are slightly closer to what I have in mind.

The type of plan I am referring to is a non-qualified deferred compensation plan. Unlike 401(k)s, they are not protected from the sponsoring organization (or the sponsoring organization's creditors) accessing the funds, for example, in bankruptcy. On the other hand, they can smooth out income taxes, and are not subject to the same contribution caps as 401(k) plans. Like in a 401(k), these non-qualified plans allow you to control how funds are invested while they are deferred. Unlike 401(k)s, you choose when they will pay distributions in advance.

Here's a little bit more about this kind of plan, from Fidelity: https://www.fidelity.com/viewpoints/retirement/nqdc

> Most companies provide NQDC plans as an executive retirement benefit, because 401(k) plans often are inadequate for high earners

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