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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

#231

Post by slapshot »

ccheever wrote: post #219
sulam wrote: post #188

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 w…

Do you have a link to this analysis? I couldn't find it online.

https://www.fenwick.com/publications/Pages/Proposed-Tax-Refo...

> The proposed bill leaves Section 422 of the Code, governing the taxation of ISOs, untouched, apparently exempting it from new Section 409B. As a result, ISOs may continue to offer employees eligibility to receive favorable tax treatment by deferring taxation until sale

Re: Don’t Tax Options and RSUs Upon Vesting

#232

Post by js2 »

sulam wrote: post #188

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 w…

That seems correct:

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 stock options) or which consists of a trust to which section 402(b) applies.

Page 209 of https://www.jct.gov/publications.html?func=download&id=5031&...

But I'm not sure how this impacts ISOs with an 83(b) election.

Re: Don’t Tax Options and RSUs Upon Vesting

#233

Post by chimeracoder »

kevinburke wrote: post #226

A friendly reminder that it's VC's like Fred Wilson who insist on provisions in option grants that require exercise within 90 days of leaving a company.

> A friendly reminder that it's VC's like Fred Wilson who insist on provisions in option grants that require exercise within 90 days of leaving a company.

Well, except that the IRS also has a say in this as well. The IRS won't let companies issue ISOs with no expiration date like that; if the company tries, they'll be treated as NSOs for tax reasons, which defeats the whole point.

There was actually a bill last year that would have fixed this specific situation (taxation of ISOs for startup employees in a way that doesn't expire 3 months after termination), but the Senate Democrats blocked it, because they branded it as a "tax cut for the wealthy".

Re: Don’t Tax Options and RSUs Upon Vesting

#234

Post by [deleted] »

ccheever wrote: post #219
sulam wrote: post #188

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 w…

Do you have a link to this analysis? I couldn't find it online.

[deleted]

Re: Don’t Tax Options and RSUs Upon Vesting

#235

Post by sulam »

slapshot wrote: post #231
ccheever wrote: post #219

Earlier quoted context omitted.

Do you have a link to this analysis? I couldn't find it online.

https://www.fenwick.com/publications/Pages/Proposed-Tax-Refo... > The proposed bill leaves Section 422 of the Code, governing the taxation of ISOs, untouched, apparently exempting it from new Section 409B. As a result, ISOs may continue to offer employees eligibility to receive favorable tax treatment by deferring taxation until sale

Thanks, you beat me to it!

Re: Don’t Tax Options and RSUs Upon Vesting

#236

Post by chimeracoder »

mmanfrin wrote: post #228
chimeracoder wrote: post #222

Earlier quoted context omitted.

> 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).

> 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).

After Facebook learned this lesson the "hard" way[0], that's actually pretty standard. Every startup started within the last 5+ years has this same provision in their options, if you read the fine print, and older companies all amended their option terms for new grants.

[0] hard way for Facebook, not for the employees.

Re: Don’t Tax Options and RSUs Upon Vesting

#237

Post by icebraining »

pascalxus wrote: post #221
icebraining wrote: post #210

Earlier quoted context omitted.

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.

Sure, but who said we should simply "trust" that?

Re: Don’t Tax Options and RSUs Upon Vesting

#238

Post by sulam »

TimPC wrote: post #225
sulam wrote: post #215

Earlier quoted context omitted.

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 pric…

The common vs preferred spread is usually enough to make this a non-issue unless you are a very well-paid executive. This is why I was careful to say the _average_ employee is likely to do better, strictly in terms of startup compensation.

Re: Don’t Tax Options and RSUs Upon Vesting

#239

Post by jsonne »

tschellenbach wrote: post #187
jsonne wrote: post #183

Earlier quoted context omitted.

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).

>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.

I mean knowing "many" is different than that being the majority of the cases, and I would strongly dispute that working at a startup is a "low risk" way of achieving some huge financial upside. I in fact remember seeing on Hacker news a few months back (I'll see if I can find it) a study that basically stated that in the aggregate employee stock options at startups aren't worth the risk.

Re: Don’t Tax Options and RSUs Upon Vesting

#240

Post by JoshTriplett »

slantedview wrote: post #145
heimidal wrote: post #109

Earlier quoted context omitted.

Existing grants would be grandfathered in, so giving them back may not make much sense. Future grants, though, should just be killed and you should negotiate for higher pay.

Is the grandfathering section clear on that? It mentions deferred compensation, which I'm not sure was a comment on options specifically or something else.

> It mentions deferred compensation, which I'm not sure was a comment on options specifically or something else.

Deferred compensation plans are something else entirely; they're a way to say "hold back part of my salary and invest it in a 401k-like thing, and give it to me later". (Such plans are non-qualified and not backed by anything other than the credit of the company, unlike a 401k, so not something you want to do if you have any doubts in future solvency.)

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