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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

#221

Post by pascalxus »

icebraining wrote: post #210
s73ver_ wrote: post #199

Earlier quoted context omitted.

"Maybe an employee believes in the company and wants to take part, deeming the risk is worth it for them? Clearly that's what's happening." And that belief is abused, and the employees get fucked over when it comes time for an acquisition, as their shares get dilluted to hell and back.

Yes, that often happens and it's clearly unethical. What's your point?

His point is, that you have to assume that will happen quite often. We're simply not equipped to forsee all the legal and financial risks of having stock options. We've seen too many ways that employees have been taken advantage of. You can't simply "trust" that if the company does well, you'll do well.

Re: Don’t Tax Options and RSUs Upon Vesting

#222

Post by chimeracoder »

mmanfrin wrote: post #216

I remember reading about a nightmare scenario of earlier Uber employees having to give up hundreds of thousands (or possibly millions) of dollars because of how their options were taxed. It has since changed, I believe, but it used to be that: Upon leaving the company, they would have 90 days to exercise options. If they'd been there for a couple years during the fast growth phase, it's possible they had (e.g.) $500k…

> Upon leaving the company, they would have 90 days to exercise options. If they'd been there for a couple years during the fast growth phase, it's possible they had (e.g.) $500k in options with a strike price at $10k. Uber prohibited secondary market sales, so if you exercised your options, you had to hold on to them until IPO. However, you;d have to pay taxes on the gains on those vested options despite being unable to sell them

Unfortunately, this applies to every successful startup that issues options (instead of RSUs). It's not just Uber.

Re: Don’t Tax Options and RSUs Upon Vesting

#223

Post by vostok »

CalChris wrote: post #214
vostok wrote: post #143

Earlier quoted context omitted.

> For example, what part of repealing the estate tax for inheritances above $5.5 million will help this urban middle class? The narrative is that the tax bill is meant to help the rich and the rural red state poor at the expense of the urban blue state middle class.

I don't see how the tax plan helps the rural red state poor. It certainly helps the rich and prefers red states (people lose state and local deduction, businesses keep it). However, the rural red state poor already aren't paying much if any taxes. It's more of a red meat issue for them.

I honestly haven't calculated the tax difference for the rural red state poor. Are you sure they won't benefit from the increased standard deduction? If you're sure then I'll trust your calculations over my not-calculations.

Re: Don’t Tax Options and RSUs Upon Vesting

#224

Post by teej »

mmanfrin wrote: post #216

I remember reading about a nightmare scenario of earlier Uber employees having to give up hundreds of thousands (or possibly millions) of dollars because of how their options were taxed. It has since changed, I believe, but it used to be that: Upon leaving the company, they would have 90 days to exercise options. If they'd been there for a couple years during the fast growth phase, it's possible they had (e.g.) $500k…

It’s worth noting that there are companies who will front you the cash to buy your options and cover tax, in return for a cut of the proceeds. People in this situation have options.

Re: Don’t Tax Options and RSUs Upon Vesting

#225

Post by TimPC »

sulam wrote: post #215
TimPC wrote: post #205

Earlier quoted context omitted.

It depends a lot on the pricing of that $100K. If that's based on price at time of vesting you run into big problems -- that's not how ISO's work currently but it's unclear exactly what is going to change in this bill. Say you get $50K/year in stock at the valuation based on the time you join the start-up and the start-up has on paper 10X growth in 2 years. In your 3rd year, your $50K of stock is $500K on paper so th…

I tried to be clear above -- the cap is based on the grant value, not the vested value -- ie it is strike price, not 409A (or other) exercise value. Really, if you think about it, it could only be this way. You can't predict the future value of your company. If I give you an ISO grant now, but the company doubles in value next year and puts you over the cap, we're in a pickle.

The other thing to keep in mind is how much comp is the right to in the future buy $100k present value of stock for $100k. Even if that option prices at 20% the “100k” is only 20k of comp. For many positions 100k/year of stock may be too limiting. If there are ways to manipulate the share value of the class of shares you are getting to a small fraction then it might work. But if this excise price is the VC round price for a worse class of share the amount of comp here is fairly small.

Re: Don’t Tax Options and RSUs Upon Vesting

#227

Post by ibejoeb »

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…

It really isn't "made up." Issuing equity compensation triggers all sorts of activity. The notion of vesting is that the individual will come to own shares after the conditions are met sufficient to lift the restrictions. The restrictions often include time in service to company ("after 1 year of service, you will earn 100 shares"), performance toward some specific goal ("prototype passed QA by Q3"), and financial performance of the company ("EPS increased by 2%").

In these arrangements, the recipient is agreeing in advance to accept equity as compensation. The company must account for that essentially as if it were cash, and it becomes an income statement item just like any other compensation expense.

The economic event, for both the issuer and the recipient, is the moment when there is no material risk of forfeiture. In simple terms: if the company can't take them away from you, they are yours.

Re: Don’t Tax Options and RSUs Upon Vesting

#228

Post by mmanfrin »

chimeracoder wrote: post #222
mmanfrin wrote: post #216

I remember reading about a nightmare scenario of earlier Uber employees having to give up hundreds of thousands (or possibly millions) of dollars because of how their options were taxed. It has since changed, I believe, but it used to be that: Upon leaving the company, they would have 90 days to exercise options. If they'd been there for a couple years during the fast growth phase, it's possible they had (e.g.) $500k…

> Upon leaving the company, they would have 90 days to exercise options. If they'd been there for a couple years during the fast growth phase, it's possible they had (e.g.) $500k in options with a strike price at $10k. Uber prohibited secondary market sales, so if you exercised your options, you had to hold on to them until IPO. However, you;d have to pay taxes on the gains on those vested options despite being unabl…

The difference is that in most situations you can sell vested options on a secondary market, Uber made it a contractual requirement on vesting that they could not be sold on any secondary market (they could only be sold back to Uber for the strike price).

Re: Don’t Tax Options and RSUs Upon Vesting

#229

Post by sulam »

hatred wrote: post #218
djrogers wrote: post #213

Earlier quoted context omitted.

One would assume that companies would stop doing this and issue ISOs instead.

Its not that trivial. ISO's have a $100k limit.

Yeah, there's a couple reasons for RSUs to exist and the cap is a big one (the other is shareholder limits). However, the issue is vesting, not the RSU itself. You can delay RSU vesting to happen at a liquidity event and the problems go away. That leads to a bad situation where employees are stuck holding their "earned but not vested" RSUs and can't quit (similar to what already happens to people who can't afford to exercise their ISOs, or even if they can, they get bombed by AMT and don't have a liquid stock to pay taxes with). This seems like a solvable problem. If all it did was cause companies to figure out how to make their shares liquid in some fashion (IPO, secondary market, private exchange -- something) that would be net-positive for employees.

Re: Don’t Tax Options and RSUs Upon Vesting

#230

Post by mmanfrin »

teej wrote: post #224
mmanfrin wrote: post #216

I remember reading about a nightmare scenario of earlier Uber employees having to give up hundreds of thousands (or possibly millions) of dollars because of how their options were taxed. It has since changed, I believe, but it used to be that: Upon leaving the company, they would have 90 days to exercise options. If they'd been there for a couple years during the fast growth phase, it's possible they had (e.g.) $500k…

It’s worth noting that there are companies who will front you the cash to buy your options and cover tax, in return for a cut of the proceeds. People in this situation have options.

I read about these only in response to the situation a lot of engineers were in at Uber -- was this a thing prior?
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