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Don’t Tax Options and RSUs Upon Vesting

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171–180 of 388 posts

Re: Don’t Tax Options and RSUs Upon Vesting

#171

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…

> No one would want options anymore, which would make it impossible for startups to compete with large, cash-rich incumbents.

You're right; nobody would want options. So we have to start paying people in actual shares if we want to give equity. Which means you have to give employees way more of the company than deep-pocketed investment bankers who will still invest -- despite their temper tantrums to the contrary -- because there are very few companies that can absorb a nine-to-ten figure investment and do something productive with it.

Just because the system as it exists right now would be destroyed doesn't make this a bad change. The system right now is overly complicated, leads to workers abandoning in-the-money options or staying at a job they hate, and is heavily slanted towards early employees.

But the current model of venture financing is largely dead regardless of whether this change goes through. It's already being replaced by cryptocurrencies / ICOs, which seem like a far more sensible method of issuing restricted stock in excess of the SEC's limitations (since the right crypto / wallet scheme for something like this would not be anonymous). I think ultimately, cryptocurrencies are going to replace RSUs, but the cryptocurrencies that replace RSUs will probably have many of the same governance restrictions as RSUs.

How we treat them for tax purposes is a different problem, but it should make the RSU liquidity problem less troublesome (e.g. you can sell some of your crypto-RSUs back to the company in exchange for ETH/BTC, then convert back to USD and pay your taxes).

Re: Don’t Tax Options and RSUs Upon Vesting

#172

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…

yeah, this is old guard trying to put up barriers against up-and-comers in tech, under the guise of sticking it to the elites (ironically).

equity compensation has plenty of risks, which is why the timing of taxes gets complicated. the value of the underlying asset needs to solidify enough (meaning there is a liquid enough market for the equities) that it can be (partially) liquidated and used to pay the tax. but the variance in the liquidity over time is so high that it's nearly impossible to properly predict when the tax man should come knocking on the door.

Re: Don’t Tax Options and RSUs Upon Vesting

#173
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 t…

You get what you pay for.

California is able to spend my state taxes on things that I want, and the federal government gets to not pay for those things.

Texas has to spend federal dollars if they want similar things. Their options are either to not have nice things, or to spend more federal dollars than California does.

That's what the deduction attempts to account for.

Re: Don’t Tax Options and RSUs Upon Vesting

#174

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…

> No one would want options anymore, which would make it impossible for startups to compete with large, cash-rich incumbents. You're right; nobody would want options. So we have to start paying people in actual shares if we want to give equity. Which means you have to give employees way more of the company than deep-pocketed investment bankers who will still invest -- despite their temper tantrums to the contrary --…

> So we have to start paying people in actual shares if we want to give equity.

People wouldn't want that either; they'd still have to pay tax on shares that were, for practical purposes, worthless at time of issue (and time tax due) and would statistically probably always be worthless.

Under this system, you'd really have to abandon compensation with stock of any sort for non-publicly traded entities.

Re: Don’t Tax Options and RSUs Upon Vesting

#175

Earlier quoted context omitted.

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.

I used to feel that way too until I tried it multiple times. All of the startups I've been involved with have been buried or purchased with deals that made my options worthless or effectively worthless (i.e. needing to come up with enough capital to execute the options for such a meager gains that it was hardly worth the effort).

Re: Don’t Tax Options and RSUs Upon Vesting

#176
post #111

Earlier quoted context omitted.

Why would you be shocked? There's all sorts of nasty things in these tax proposals for the less than wealthy. They are looking everywhere they can to find offsets to make the tax cuts for the donor class work under the budget rules.

If you're getting options and RSUs, you're going to be upper middle class at least, and thus wealthy by the definitions of most Americans.

When people talk about this package benefiting the wealthy, they mean very wealthy people. The upper-middle-class would probably take more damage from it than most.

Re: Don’t Tax Options and RSUs Upon Vesting

#177

Earlier quoted context omitted.

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…

That's just it. Where I am, I don't see new companies building anything . YC isn't here . I'd love to work for a startup with a like-brand-X-but-for-Y or a word-salad elevator pitch, that also offered a compensation package as good as any found in Silicon Valley. But I don't get options or RSUs, or even cash bonuses. I get billed to a customer at $200-$400/hr and get maybe $50-$60 of that in total compensation. It's…

You don't like what some of the startups in the current age are focusing on, so you want disincentivize all startups in general, for perpetuity? That's an incredibly extreme response.

Throwing the baby out with the bathwater, if I've ever seen it.

Re: Don’t Tax Options and RSUs Upon Vesting

#178

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…

On the other hand, even $1M/year doesn't look good compared to what you would have made via options/RSUs if you were employee < 10 at Facebook/Google/Amazon...

Re: Don’t Tax Options and RSUs Upon Vesting

#179

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…

> No one would want options anymore, which would make it impossible for startups to compete with large, cash-rich incumbents. You're right; nobody would want options. So we have to start paying people in actual shares if we want to give equity. Which means you have to give employees way more of the company than deep-pocketed investment bankers who will still invest -- despite their temper tantrums to the contrary --…

> So we have to start paying people in actual shares if we want to give equity

This is also a big gamble if you're given shares in a non-public company. You pay taxes on these shares at vesting - not only have you reduced your liquidity until IPO/exit, but these shares could end up being worth nothing if the company fails.

Re: Don’t Tax Options and RSUs Upon Vesting

#180
I've had a similar tax issue which caused a few 100k in taxes on unrealized gains. That was not a happy day and I could barely pay the tax bill. In my case the issue involved moving from The Netherlands to the US. As far as I know the US is one of the only countries which taxes unrealized gains. In The Netherlands you only get taxed once you actually make the money. The VC industry is world class here in the US, but some of these tax rules are so backwards that they do real damage to startups and the economy as a whole.
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