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Don’t Tax Options and RSUs Upon Vesting

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Re: Don’t Tax Options and RSUs Upon Vesting

#21

Post by austenallred »

eldavido wrote: post #16

I think the way we do options in startups needs a more fundamental rethink. I wouldn't be too sad if the current system falls on its face. I like Buffett's proposal from a few years ago. They don't grant stock, they simply pay cash (bonuses) and if employees want to buy in, it's their money, after all. What's really needed is a way some group of insiders in a company can transfer shares among themselves or outsiders.…

That’s the point of options though - most of the time that “cash” doesn’t exist to be paid out in bonuses. Options are a bet that it will exist in the future.

Why do startups pay lower salaries than Facebook? Because Facebook throws around $200-300k salaries and doesn’t care. Startups can’t do that, so it promises a piece of the pie if the company becomes big and successful instead.

Re: Don’t Tax Options and RSUs Upon Vesting

#22

Post by BeetleB »

>What this would mean is every month, when your equity compensation vests a little bit, you will owe taxes on it even though you can’t do anything with that equity compensation.

I'm not sure what he means with regards to RSUs.

When my RSUs vest, I am taxed on them currently. And I can do whatever I want with them. My employer gives me RSUs with a 4 year vesting period - a quarter vests every year. And every year a quarter of those stocks are given to me to do whatever I want with them.

Perhaps he was referring to something other than RSUs? Or it is only relevant for private companies (which all startups are)?

Re: Don’t Tax Options and RSUs Upon Vesting

#23

Post by briandear »

aresant wrote: post #7

"But, sadly, I don’t think this is really about what makes sense. It is about politics." Clearly this proposal is targeted directly at private SV and tech companies. And the mortgage deduction and state tax write off proposals are targeted at California / NY. Outside of just a big FU from the Republicans to largely Democratic states what is the end game? E.g. - what are the Republicans actually negotiating for, assum…

State tax write offs are fundamentally unfair. The US government effectively subsidized high tax states.

A guy making $100k in Texas ought to have the same exact tax federal burden of a guy making $100k in New Jersey. As it stands now, those two guys pay a different amount to the federal government. That is unfair. A state can raise state taxes will little impact on residents however it results in lower tax revenue to the US government and more revenue to the specific state.

High tax states hate giving up that deduction because they would effectively be giving up a subsidy.

Re: Don’t Tax Options and RSUs Upon Vesting

#24

Post by mooreds »

austenallred wrote: post #21
eldavido wrote: post #16

I think the way we do options in startups needs a more fundamental rethink. I wouldn't be too sad if the current system falls on its face. I like Buffett's proposal from a few years ago. They don't grant stock, they simply pay cash (bonuses) and if employees want to buy in, it's their money, after all. What's really needed is a way some group of insiders in a company can transfer shares among themselves or outsiders.…

That’s the point of options though - most of the time that “cash” doesn’t exist to be paid out in bonuses. Options are a bet that it will exist in the future. Why do startups pay lower salaries than Facebook? Because Facebook throws around $200-300k salaries and doesn’t care. Startups can’t do that, so it promises a piece of the pie if the company becomes big and successful instead.

Nor does the ability to "buy in" exist for normal employees unless the business is public or sets up some kind of ESOP.

Re: Don’t Tax Options and RSUs Upon Vesting

#25

Post by eldavido »

austenallred wrote: post #21
eldavido wrote: post #16

I think the way we do options in startups needs a more fundamental rethink. I wouldn't be too sad if the current system falls on its face. I like Buffett's proposal from a few years ago. They don't grant stock, they simply pay cash (bonuses) and if employees want to buy in, it's their money, after all. What's really needed is a way some group of insiders in a company can transfer shares among themselves or outsiders.…

That’s the point of options though - most of the time that “cash” doesn’t exist to be paid out in bonuses. Options are a bet that it will exist in the future. Why do startups pay lower salaries than Facebook? Because Facebook throws around $200-300k salaries and doesn’t care. Startups can’t do that, so it promises a piece of the pie if the company becomes big and successful instead.

I don't think this is true anymore. I think this is one of those funny vestigial things that evolved in a different era.

If you think of a startup as a true "garage venture" with a few people toiling away trying to ship a product, maybe that's the right model.

That isn't really the model for SV entrepreneurship anymore, though, even though we kinda pretend it is. How it works today is, $8 million-dollar "seed" rounds, downtown office space, early-stage companies paying $150k or more for talent, incubators and signaling, etc.

Maybe one of those cases where the game has changed, but our mythos hasn't.

Re: Don’t Tax Options and RSUs Upon Vesting

#26

Post by neom »

This is awful. Now, if your founder/lawyer was kind, you CONVERT the ISO stock to NSO upon leaving the business and increase the excursive window, so they are not NSOs till the employee leaves the business. (NSO tax per vest, ISO tax on exercise)

The way it works in my business is: you have regular ISOs, you vest, you leave, we convert to NSO and give you 8 years to buy them. You're not vesting anymore, so you sidestep the vesting tax associated with NSO, and you pay the cap gain in 8 years. This is the most employee friendly way to structure things as not everyone has liquidity to deal with what they have earned (both buying the grants and the tax associated with buying the grants).

Under the new plan, the rule around NSOs being taxed per vest (remember when you leave you're not vesting anymore) will be applied to all types of employee stock option compensation. That's madness. Personal opinion: On the plus side, maybe salaries will go up and stock grants will go down (imo unhealthy). It will also push more 409a. :\

(Edit- My COO says: julie [11:57 AM] that provision is already being softened in the latest amendment btw)

Re: Don’t Tax Options and RSUs Upon Vesting

#27

Post by saas_co_de »

ajmurmann wrote: post #13
aresant wrote: post #7

"But, sadly, I don’t think this is really about what makes sense. It is about politics." Clearly this proposal is targeted directly at private SV and tech companies. And the mortgage deduction and state tax write off proposals are targeted at California / NY. Outside of just a big FU from the Republicans to largely Democratic states what is the end game? E.g. - what are the Republicans actually negotiating for, assum…

I can't overstate how sad it would be if the goal of this change was plainly to stick to to Democrat states. It there is truly do much disdain that didn't boat well for the future as a united country.

The entire tax bill seems to be sticking it to Democrat states, in particular New York and California, but it is really about urban vs. rural politics.

Democrats have become too concentrated as a party in urban areas and so rural voters have gotten enough political power to attempt to address what they view as economic inequities in the current urban/rural income distribution.

Republican have also flipped the script on Democrats and so now they are proposing to tax the "rich" (actually urban middle class) and redistribute that to the poorer rural middle class.

It is funny because conservatives have been warning for decades that redistributionist games don't end well, while the Democrats have been advocating them, but now that the shoe is on the other foot it doesn't seem like such a good idea.

Re: Don’t Tax Options and RSUs Upon Vesting

#28

Post by mooreds »

eldavido wrote: post #25
austenallred wrote: post #21

Earlier quoted context omitted.

That’s the point of options though - most of the time that “cash” doesn’t exist to be paid out in bonuses. Options are a bet that it will exist in the future. Why do startups pay lower salaries than Facebook? Because Facebook throws around $200-300k salaries and doesn’t care. Startups can’t do that, so it promises a piece of the pie if the company becomes big and successful instead.

I don't think this is true anymore. I think this is one of those funny vestigial things that evolved in a different era. If you think of a startup as a true "garage venture" with a few people toiling away trying to ship a product, maybe that's the right model. That isn't really the model for SV entrepreneurship anymore, though, even though we kinda pretend it is. How it works today is, $8 million-dollar "seed" rounds…

Maybe this is true in SV. My experience in other areas of the country is that startups, especially early stage ones, don't have that kind of cash.

Re: Don’t Tax Options and RSUs Upon Vesting

#29

Post by ihsw2 »

austenallred wrote: post #18

The importance of this change can’t be understated; this effectively kills compensation at startups in the form of equity, and would make startups completely unable to compete with incumbents. Anyone that has options at a company that grows quickly would be paying tens or hundreds of thousands in taxes to keep their equity, which is still effectively a very risky bet that a company will end up huge. No one would want…

While this is an unintended consequence, how do you otherwise tax the massive equity compensation packages offered to executives? It has to be across the board.

Re: Don’t Tax Options and RSUs Upon Vesting

#30

Post by austenallred »

eldavido wrote: post #25
austenallred wrote: post #21

Earlier quoted context omitted.

That’s the point of options though - most of the time that “cash” doesn’t exist to be paid out in bonuses. Options are a bet that it will exist in the future. Why do startups pay lower salaries than Facebook? Because Facebook throws around $200-300k salaries and doesn’t care. Startups can’t do that, so it promises a piece of the pie if the company becomes big and successful instead.

I don't think this is true anymore. I think this is one of those funny vestigial things that evolved in a different era. If you think of a startup as a true "garage venture" with a few people toiling away trying to ship a product, maybe that's the right model. That isn't really the model for SV entrepreneurship anymore, though, even though we kinda pretend it is. How it works today is, $8 million-dollar "seed" rounds…

That’s simply incorrect. I founded a company that raised a mammoth seed round in Silicon Valley (not $8m but more than $3m), and we do pay some high salaries, but Apple and Facebook still pay salaries that are much, much higher.

Critical employees have joined us while taking $100,000/yr pay cuts, despite. Having a salary in the six figures.

To think that startups can play that game of “equity doesn’t matter” is just wrong, even in an era of $8m seed rounds. I know HN likes to say “go for cash not stock,” which is a good way to negotiate if you want to avoid downside risk, but if you eliminate stock compensation there’s no way startups can play ball with incumbents. Full stop.

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