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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

#51

Post by t_fatus »

trothamel wrote: post #41

Isn't this a change that makes the tax code fairer? It seems like options and RSUs have value associated with them. At the very least, the person who is receiving them considers them to have value. Stock options are traded on markets, and priced some how. Part of the new tax plan seems to be trying to lower the tax brackets, in exchange for preventing people from avoiding taxes. That's why it seems to be doing things…

Options and RSUs gain value the day you pay for the underlying stocks, not the day you're allowed to buy a stock which could later in time become worthless. don't forget they're aimed at employees so they can share the value created by the company they work within, and that these employees will pay taxes in time when they extract any value from their companies

Re: Don’t Tax Options and RSUs Upon Vesting

#52

Post by School-Cotton »

seattle_spring wrote: post #47
School-Cotton wrote: post #35

My RSUs have always been taxed on vest -- what am I missing?

Is your company publicly traded? The OP is referring to issues when the stock is illiquid.

Yes it is publicly traded. So, how does it work with privately traded companies. Talking about RSUs, not options. What is the difference between "release of the underlying shares" and "vest" ?

Re: Don’t Tax Options and RSUs Upon Vesting

#53

Post by austenallred »

logfromblammo wrote: post #43
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…

What if your goal is for technical talent to prefer companies that make parts for the F-35 that actually function as intended, instead of companies that could be described as "Uber for cat-sitters" or "the Snapchat of Etsy-linked Tumblr posts" or "Pets.com with more tulip bulbs" or "like Facebook, except fronting for GRU instead of NSA"? In that case, it would meet that goal very well. What a pity it is that the tech…

In this instance the exchange you would have to make would be crippling startups and small businesses, which is where the vast majority of the growth of the economy happens.

As an aside, how many companies do you see actually building Snapchat for Etsy-linked tumblr posts? I see that criticism of Silicon Valley all the time, yet despite being in the heart of it I rarely see that kind of company. I’d guess an order of magnitude more money is going into building human transporting drones and supersonic jets than into the silly stuff people love to rail on the Valley for.

Look at the list of startups that just came out of YC and you’ll see maybe one or two companies that fit that kind of mockery.

Re: Don’t Tax Options and RSUs Upon Vesting

#54

Post by t_fatus »

conanbatt wrote: post #48
trothamel wrote: post #41

Isn't this a change that makes the tax code fairer? It seems like options and RSUs have value associated with them. At the very least, the person who is receiving them considers them to have value. Stock options are traded on markets, and priced some how. Part of the new tax plan seems to be trying to lower the tax brackets, in exchange for preventing people from avoiding taxes. That's why it seems to be doing things…

> and the free food some companies supply their employees. This is a long standing question. Are costs of benefits like these one not taxed in the US? The implications of not taxing that is huge.

comparing free food, which you directly benefit, and RSUs seems really unfair.

Re: Don’t Tax Options and RSUs Upon Vesting

#55

Post by bgentry »

buckhx wrote: post #12
ajmurmann wrote: post #6

Can someone explain how the taxable amount would be calculated if the company isn't listed on the stock market. My options are for value x per share. I would expect to pay taxes for y - x with y being the market value. How does the actual market value get established? Will that number just come from what was used when someone invested previously?

Fair Market Value determined by a 409a valuation.

Interesting side note. This proposed legislation actually completely removes section 409A from the tax code and replaces some parts of it. I’m not sure if the rules around company valuation will change dramatically but it seems that they won’t be called 409A valuations anymore if this passes:

http://bakerxchange.com/rv/ff0034eed7a7d447f644f491d94caddcb...

Re: Don’t Tax Options and RSUs Upon Vesting

#56

Post by ihsw2 »

kyleblarson wrote: post #34
ihsw2 wrote: post #29

Earlier quoted context omitted.

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.

It's already taxed whenever they exercise.

Well, perhaps increasing tax at exercise was politically untenable, but tax at vesting was. Just a hunch that they needed to grab from somewhere easy.

Re: Don’t Tax Options and RSUs Upon Vesting

#57

Post by herodotus »

What does it mean for an RSU to "vest"? My understanding of RSUs is that it means the company will give you some shares if you still work there at some specified date. Vesting is a stock option concept - the time at which you can choose whether or not to sell some of the granted shares. Which means that you can sell some shares to pay your taxes when the shares vest.

Is the current proposal meant to tax the RSUs when you are told you will be getting them?

Re: Don’t Tax Options and RSUs Upon Vesting

#58

Post by t_fatus »

BeetleB wrote: post #22

>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 qu…

You can do everything with them if they are publicly traded, if not what are you going to do ? If you're working in a early stage company which can see its valuation goes north (probably one of the reasons you work there instead of google btw) you could try to convince someone to buy some of your stock each month to pay for these vested shares you just get ?

Re: Don’t Tax Options and RSUs Upon Vesting

#59

Post by austenallred »

oneshot908 wrote: post #45
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.

At this point, unless you're C-suite, most startups are a really bad bet compared to the BigCos paying out anywhere from $250K-$1M annually depending on your skill set and experience. What's happening now IMO is that the hot talent has figured this out and they have accepted positions at Tesla, Salesforce, Google, Facebook, Apple, or Amazon. That said, I know someone who walked away from a $10M package over 4 years t…

It all depends. It’s certainly hard to compete with a $500k/yr sure thing, but personally I’d rather have a $150k/yr salary with a chance to retire if the company does well than a sure $200k/yr. It just all depends.

Risk-adjusted, the best way to get returns is probably to take an equity-heavy stake at a post-series-B startup with obvious growth and product market fit.

Re: Don’t Tax Options and RSUs Upon Vesting

#60

Post by seattle_spring »

School-Cotton wrote: post #52
seattle_spring wrote: post #47

Earlier quoted context omitted.

Is your company publicly traded? The OP is referring to issues when the stock is illiquid.

Yes it is publicly traded. So, how does it work with privately traded companies. Talking about RSUs, not options. What is the difference between "release of the underlying shares" and "vest" ?

The proposal is that the employee will have to pay tax on RSUs upon vest, even though the underlying assets cannot be sold. For example:

Employee A has 40,000 shares of stock granted upon hire, vesting 25% per year. So on year 1, they vest and have to pay taxes on 10,000 shares. Say those shares are valued at $25 per share. In a public company, you could just sell $25 of those shares and be left with 7,500 shares. At the private company, under the new rules, you'll have 10,000 shares that you cannot sell, but still be liable for paying tax on $250,000.

Those shares may never be liquid, and this rule can and will bankrupt people.

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