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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

#181

Post by exelius »

rsynnott wrote: post #174
exelius wrote: post #171

Earlier quoted context omitted.

> 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.

I think the key here is that the valuations would change and likely be far more realistic. We certainly haven't seen the whole story on cryptocurrencies to know what regulation needs to apply, so I'll withhold any speculation there. But I have a feeling that with the amount of data a blockchain-based security gives you, the need to restrict non-publicly traded entities somewhat goes away (since you can always audit after-the-fact if the ledger is distributed).

In any case, the market would be far more liquid. I'm not a huge fan of cryptocurrencies for personal use, but I absolutely think they're going to take over the world when it comes to the money used in investment finance (which is ~99% of the money on Earth).

Re: Don’t Tax Options and RSUs Upon Vesting

#182

Post by logfromblammo »

pc86 wrote: post #158
austenallred wrote: post #53

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…

We need to draw a distinction between "startups" and "small businesses." Options and RSUs, as a vehicle for engineering talent, is largely a VC/SV thing. I work on the east coast in a non-NYC city, and options/RSUs simply do not exist, even at what most people would consider tech/software companies, even the ones with venture investment. Certainly, Bill's Hardware down the street does not offer stock options. By and…

And that's why Silicon Valley is on its own for this one.

It hasn't loaned me its political power for anything that matters to me, and so for this issue that impacts me not at all, I will not be returning any favors.

The collapse of the 2002 bubble hurt everywhere else far more deeply than SV, with a more painful recovery, so I see anything that might curb irrationally exuberant investment in companies that are not likely to ever benefit rust belt economies as a good thing.

Furthermore, I am more in favor of simpler employee incentives that do not force people to invest where they work. At the income level of a typical tech employee outside of SV and NYC, any investments should likely be buy-and-ignore in a robot-managed index fund. I don't want all my net worth to be tied up in my employer, especially when we have no contract, no real control over its business strategy or tactics, and I can be fired at will. If you want to pay me $X, pay me $X.

Re: Don’t Tax Options and RSUs Upon Vesting

#183

Post by jsonne »

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…

I mean not to be a jerk about it but so what? It seems like giving out high risk stock options is a bad deal for workers overall. If the goal is to grow the economy wouldn't paying a rank and file employee more fairly be better for more people and the economy as a whole?

Re: Don’t Tax Options and RSUs Upon Vesting

#184

Post by spullara »

StevePerkins wrote: post #147
spullara wrote: post #89

The text of the bill specifically says that it is not intended to apply to statutory options (ISOs). From page 123: "However, it is intended that statutory options are not considered nonqualified deferred compensation for purposes of the proposal. An exception is provided for that portion of a plan consisting of a transfer of property described in section 83 (other than nonstatutory stock options), or a trust to whic…

Do you have a link to the actual bill?

Link to the bill with before / after descriptions. Starts at page 116:

https://www.finance.senate.gov/imo/media/doc/11.9.17%20Chair...

Re: Don’t Tax Options and RSUs Upon Vesting

#185

Post by tschellenbach »

exelius wrote: post #171
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…

> 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 --…

The problem with giving employees shares is that they would either need to pay for those shares or be taxed on their value. This would effectively limit early stage startup participation to those with a nicely filled bank account.

Re: Don’t Tax Options and RSUs Upon Vesting

#187

Post by tschellenbach »

jsonne wrote: post #183
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…

I mean not to be a jerk about it but so what? It seems like giving out high risk stock options is a bad deal for workers overall. If the goal is to grow the economy wouldn't paying a rank and file employee more fairly be better for more people and the economy as a whole?

I know many early stage employees that achieved significant financial upside by working at early stage startups. Working at an early stage startup is probably the only low-risk way of achieving that. Creating your own startup is of course always an option but requires significant upfront capital, a huge opportunity cost in terms of how much you work and a significant cut to your salary. (if anything).

Re: Don’t Tax Options and RSUs Upon Vesting

#188

Post by sulam »

I'm going to say something that may be unpopular. Hopefully my karma can handle it.

The latest analysis I saw of this from Fenwick says that this is only applying to non-qualified stock options. Employees get NSOs when you vest too much to get ISOs in a calendar year, based on the vesting schedule and value at the time of grant, not fair market value at time of vesting of the option. That limit is $100K, for people who didn't know.

[edit: clarified the issue of cap calculation since my original post was in error. The point doesn’t change.]

Who else gets NSOs? Non-employees, like directors, for instance.

This tax bill is pretty awful. However, it's not obvious to me that it destroys startup compensation -- ISOs will still be given to most employees, until you are getting too big for them, when you get RSUs, just like today. If anything your average tech employee will potentially do better -- I had to sell a ton of stock simply to pay AMT on the rest of the stock I exercised at my last startup. AMT goes away in this plan, so people won't have to deal with that issue.

Re: Don’t Tax Options and RSUs Upon Vesting

#189

Post by kolbe »

ProblemFactory wrote: post #135
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 optio…

Liquidity is not a requirement for a transfer of an asset to be considered income. If your company paid for your apartment, that's income, despite the fact that it may be impossible for you to sublease it.

Certainty of future value is not a requirement for something to be considered income. You get paid in dollars all the time, but that's just an asset with fluctuating value.

There are several loopholes that get around the definition of income to defer or avoid taxes for certain types of income, but that's exactly what this is: a loophole for the wealthy. And I have no problem with SV employees enjoying tax breaks. I just can't reconcile SV's love of taxing other people, avoiding it for themselves, and still claiming this is a moral, rather than selfish, stance.

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