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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

#131

Post by abvdasker »

kolbe wrote: post #95

Serious question here. My impression is that Silicon Valley leans heavily liberal, and as such most people there believe in a progressive tax structure and generally lean towards wanting the government to receive more revenue than conservatives. If my impression is wrong, then please correct me. With this in-mind, why is there such outrage about taxing option and RSU income? It's still income. And the current situati…

RSUs issued by a private company are not income because they are completely illiquid. Taxing RSUs at vest makes no sense because their value could change after they vest but before they are converted to liquid equity.

In practice what this means is that maybe you get granted $1 million in RSUs by the private company you work for and pay hundreds of thousands of dollars in taxes. The private company goes bankrupt and never goes public or get acquired and the RSUs become worthless. You don't get those taxes back and you never got the $1 million.

Re: Don’t Tax Options and RSUs Upon Vesting

#132

Post by huac »

jerf wrote: post #42
solipsism wrote: post #32

Earlier quoted context omitted.

But who would manage this federal portfolio?

Ah, the "beauty" of the US Federal tax system is that the answer is the same as everything else in the system: You. With You being liable for back interest and penalties if You screw it up. Basically the result would be an earmarking system, payable on exercise again, as opposed to time of receiving option. That said, in the broad scheme of things it still seems workable. Startups may have to get used to also providi…

The US is an anomaly among developed countries for having a tax system that is so heavily individualistic. Plenty of other countries give tax-preparation duties to companies or the government, so individuals are mostly covered by blanket forms. The US doesn't do this because H&R Block and TurboTax would get put out of business.

So there's no real reason that we couldn't have a more elegant and streamlined process, but you're right, we won't.

Re: Don’t Tax Options and RSUs Upon Vesting

#133

Post by humanrebar »

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…

> What's happening now IMO is that the hot talent has figured this out...

It sounds like Tesla et al. have figured out the market clearing rate for great engineers. Why haven't the other companies also figured this out? There are plenty of other companies with big budgets. And early stage startups could certainly offer bigger percentages in equity (or at least better terms on the equity they offer).

Re: Don’t Tax Options and RSUs Upon Vesting

#134

Post by GeneralTspoon »

conanbatt wrote: post #64
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.…

The main problem i see with the equity system is that its absolutely intransparent in terms of cap tables and preferred shares. To the very least, if companies were forced to give out cap tables, or at least, a calculator that gives you your payout based on the company sell out cases, you would be able to measure it. Right now, the calculation is complicated and obsfucated for employees. Lets say you have 1% of stock…

It seems completely absurd to me that preferred shares exist, and one of the reasons I always hesitate whenever I'm offered equity.

For anyone curious, here's a good explaination: https://www.capshare.com/blog/how-preferred-stock-affects-th...

They basically shift a lot of downside risk from the preferred share owners (usually a VC firm I guess) to the founders and employees in the startup, which in theory makes them more likely to invest in more startups. But in the long term, this seems like it consolidates captial (which is generally a bad thing IMO).

It seems as though it just makes investing in any startup that's expected to at least be acquired at some point a 'risk-free' investment.

Anyone have any thoughts on why this might be a good thing?

Re: Don’t Tax Options and RSUs Upon Vesting

#135

Post by ProblemFactory »

kolbe wrote: post #95

Serious question here. My impression is that Silicon Valley leans heavily liberal, and as such most people there believe in a progressive tax structure and generally lean towards wanting the government to receive more revenue than conservatives. If my impression is wrong, then please correct me. With this in-mind, why is there such outrage about taxing option and RSU income? It's still income. And the current situati…

> why is there such outrage about taxing option and RSU income?

There is no outrage, or even opposition to taxing income from selling options and RSUs.

The problem arises because in some situations options and RSUs are considered "income" as themselves, not a potential to make income when they are sold.

You get some options in an early-stage startup, and have to pay tax on that. But you can't actually sell your options - there is no market, and often you aren't even allowed to sell them before the company is acquired or goes public. There is still a good chance that the company will go bust before either of these happens.

So you have to pay a tax bill years before you actually earn income, and potentially without ever earning income from your options.

Re: Don’t Tax Options and RSUs Upon Vesting

#136

Post by macspoofing »

ransom1538 wrote: post #69

"The current draft of the Senate Tax Reform Bill would tax stock options and RSUs upon vesting." Ok. I wouldn't panic here. Calm down. How shares are vested is up to the board. So, if this were to pass I would just walk into the CEO's office with a few employees and ask to change how shares vest to: "Upon the vesting schedule AND a written letter from the employee requesting vesting. If the letter isn't submitted the…

Maybe. But keep in mind the IRS isn't stupid, and they aren't simply passively taking the letter of the law. They are very much an active participant. For example, they may interpret option vesting in a different way then you just did, and they may prohibit blatant ways of getting around it.

Re: Don’t Tax Options and RSUs Upon Vesting

#137

Post by 10dpd »

bdamm wrote: post #115
ransom1538 wrote: post #75

Earlier quoted context omitted.

Yep. That isn't about publicly traded companies. The only people that would panic is if you are in a startup that cannot exercise.

I'm under the belief that vest for tax purposes isn't until the share becomes liquid. If the startup can't exercise then, for tax purposes, has the share vested? I believe it has not (and have, in the past, filed taxes on this belief, with the support of my accountant.)

You're describing how things are now and have missed the point - this bill will mean that you will have to pay tax on vesting.

Re: Don’t Tax Options and RSUs Upon Vesting

#138

Post by quickthrower2 »

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…

Yes, it would be like here in Australia, where I paid higher rate tax on non-public shares allocated to me. I didn't even have the luxury of waiting until they vest! I think if you leave a company before vesting you have to try and get that tax money back from the ATO.

In fact, you could, in theory, bankrupt someone by giving them enough shares.

I think they may have changed this for small enough companies, but still, it's a bad thing aimed at taxing middle classes not the rich. The rich don't earn shares as part of payroll, I imagine.

Re: Don’t Tax Options and RSUs Upon Vesting

#139

Post by shriram_b02 »

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…

The tech community is swiftly mobilizing against this. Outreach is being coordinated to Senate leadership. Note that this language is not what is in the House Bill.

The tech community has sought to improve tax treatment of options for some time. Currently, options are taxed at time of exercise (not ideal). Unfortunately, the Senate bill is going in the wrong direction. My company, EquityZen (equityzen.com) joined other tech companies last year in an effort to move the taxable event from exercise to sale or other disposition of shares. The Senate bill goes in the other direction, moving from time of exercise to time of vesting.

Taxation upon vesting would be a major, adverse development for founders and employees alike. The Senate is voting today on this, so as individuals we can write/call our local Senators asking them to strike Section III(H)(1) from the Senate Tax Cuts and Jobs Act.

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