281–290 of 388 posts
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.…
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It benefits the lower income groups significantly while giving a kickstart to job growth, at nearly the sole expense of the upper middle class. I don't like the plan because I pay more under it, but the value of the giveaways to the very rich seem rather small compared to low income benefits. Lowering of the corporate income tax rate and axing the mortgage interest deduction has broad support from economists across t…
"while giving a kickstart to job growth" that's less than supported by evidence right now also at current level of unemployment it doesn't seem like taxes have been the limiting factor.
Good article from Pew Research on this: http://www.pewresearch.org/fact-tank/2017/03/07/employment-v...
"As many observers have pointed out, the official unemployment definition leaves out some significant groups. The underemployed – part-time workers who would prefer to work full-time – are counted among the employed. And discouraged workers – people who’d like a job but have stopped looking because they don’t believe any work is available – aren’t counted as part of the labor force at all."
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What reasons might an early stage company (founders + 3 employees, say) have for giving the employees NSOs instead of ISOs? I was once in this situation and everyone I spoke to about it thought it was a flat-out mistake on the company's part, but I've always wondered if there was another reason.
Almost certainly a mistake. The only way I can imagine is if the company was pulling a fast one on employee taxes. If you’re a 1099 contractor, you pay your own taxes and are not eligible for ISOs. Did you get W-2s with withholding at this place?
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Almost certainly a mistake. The only way I can imagine is if the company was pulling a fast one on employee taxes. If you’re a 1099 contractor, you pay your own taxes and are not eligible for ISOs. Did you get W-2s with withholding at this place?
Yes. I wonder how this would have turned out differently if I'd had ISOs. I exercised them all and paid taxes on the difference between the strike price and the 409(a) valuation, treated as income, and the company did me a favor by arranging for me to sell a small number of shares to one of their investors at much higher than the 409(a) valuation to cover my tax bill (the agreed-upon price was close to, but not quite…
The main thing you missed out on was the ability to 83(b) exercise. If you don't know, that is something you can do in the first 90 days following the stock grant, where you write a check to the company (usually some administrator the company designates) that exercises at the same value as what the grant was written at. That means you 1) don't have any capital gains to worry about, which with AMT can be a big deal, similar to NSO treatment and 2) start the long term capital gains clock, so you are potentially taxed at a lower rate than ordinary income.
Since it sounds like this startup went out of business (?) I think you were essentially treated as well as possible.
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…
It's not income if you never exercise the option. Imagine starting as a senior-level manager at a company that's a few years into its life. They provide you with a salary of $150k/year and 100,000 options at $1 with a standard four-year vesting schedule. In the first year, the company's fair market value increases to $2/share. Your tax liability just increased as though you made an extra $25k, so you'll need to come…
That sounds no less fair than a family liquidating its estate because they can't afford the estate taxes.
That sounds no less fair than a health-conscious person taking care to never drink or do drugs paying 10x more for socialized healthcare to pay for the ailments of an obese alcoholic.
I doubt I need to go on, but the point is that taxation sucks. And it's completely hypocritical of someone to want to levy these burdens onto someone else while they themselves become indignant over a tax loophole of theirs being tightened (not even closed). It's even worse that the people who are getting indignant over it are some of the wealthiest in the United States, while at the same time, you want to stick a guy who earns $50k a year with an extra $3k with the ACA.
I do admit that the story you provided sounds like it sucks more than average, but in reality, a bank will just give you a loan to cover the taxes. No one is going bankrupt. And if the shares end up going to zero, you get to have capital carryover losses just like everyone else whose investments lost money.
But the point is that taxes, when you actually have to get down to it, suck. And if you're being truly democratic, you should try to empathize with all taxpayers in the same way that you think about your own taxes.
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.…
Link to Buffett's proposal?
The relevant section is as follows: "To say “stock-based compensation” is not an expense is even more cavalier. CEOs who go down that road are, in effect, saying to shareholders, “If you pay me a bundle in options or restricted stock, don’t worry about its effect on earnings. I’ll ‘adjust’ it away.” To explore this maneuver further, join me for a moment in a visit to a make-believe accounting laboratory whose sole mission is to juice Berkshire’s reported earnings. Imaginative technicians await us, eager to show their stuff.
Listen carefully while I tell these enablers that stock-based compensation usually comprises at least 20% of total compensation for the top three or four executives at most large companies. Pay attention, too, as I explain that Berkshire has several hundred such executives at its subsidiaries and pays them similar amounts, but uses only cash to do so. I further confess that, lacking imagination, I have counted all of these payments to Berkshire’s executives as an expense. My accounting minions suppress a giggle and immediately point out that 20% of what is paid these Berkshire managers is tantamount to “cash paid in lieu of stock-based compensation” and is therefore not a “true” expense. So – presto! – Berkshire, too, can have “adjusted” earnings."
Full pdf: http://www.berkshirehathaway.com/letters/2016ltr.pdf
I guess the difference is that big scaled companies have revenues, and cash, whereas small companies don't. But I don't think that's so true anymore in a time when companies are doing nine-figure investment rounds. I'm not saying it's typical, but I do think this model of "bundled options+cash" has got to go.
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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…
I made another comment about them below, but i will repeat in a different way. People have their own assessment of what is valuable, and getting exactly what they want means they are willing to part with as much utility. A person that loves sandwiches with blue cheese is willing to pay more for that cheese than he would with the a regular sandwich. The existence of blue cheese sandwiches is moderately irrelevant to t…
I think you're right that transparency is a big problem here. As long as others have perfect knowledge of the situation, they can factor the extra risk into their negotiations (e.g. Ask for more equity, because common shares are worth less if there are others with preferred shares).
The terminology surrounding this is quite misleading too - as you mentioned in the grandparent, having 1% of a company sold for 1M, doesn't mean you'll get 10k, which is pretty weird. Not sure what the solution is though - maybe it's just for everyone to be aware of how preferred stock works and make the cap table public.
It would also be nice if there were a standardised way for a company to say "We won't offer preferred stock for at least X years". Something like that would make me much more confident in taking equity in a company. Which, in principle, is actually what I want to do - but all these kinds of tricks essentially mean I can't (because I can't properly estimate the value of what I'm offered). Public cap tables would help, but wouldn't protect against future investment rounds with preferred shares.
This is awful. Now, if your founder/lawyer was kind, you CONVERT the ISO stock to NSO upon leaving the business and increase the excursive window, so they are not NSOs till the employee leaves the business. (NSO tax per vest, ISO tax on exercise) The way it works in my business is: you have regular ISOs, you vest, you leave, we convert to NSO and give you 8 years to buy them. You're not vesting anymore, so you sidest…
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"It is not the strike price or the exercise price. It is more-or-less the fair market value of the options when they vest, but if you need to compute your taxes, consult an accountant" This is not correct. The $100k threshold is calculated based on the fair market value of the option at the time of grant , which by definition is the exercise price. So you calculate how many shares you will vest in each year, multipli…
What reasons might an early stage company (founders + 3 employees, say) have for giving the employees NSOs instead of ISOs? I was once in this situation and everyone I spoke to about it thought it was a flat-out mistake on the company's part, but I've always wondered if there was another reason.
Or, if you plan to early exercise immediately upon receipt, you actually are better off with an NSO (due a shorter holding period for long-term capital gains treatment and there being no spread between exercise price and fair market value at the time of exercise), so sometimes you will see that too.
Or, if you want a longer than 3 months exercise period post-termination, you'll do an NSO instead of an ISO.
But otherwise, yeah, maybe just a mistake.
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Exactly. If I ran a lemonade stand, it could be the best lemonade within 100 miles, but it would also be bankrupt within an hour. I would need a non-technical co-founder that I could trust to not stab me in the back, and an investor willing to give us enough runway to take off without putting any land mines in it. So far, those conditions have never been met. Business around here is very often more about who you know…
I don't understand most of this post, but claiming you can't strike it on your own because of bureaucracy is baloney. I've done it, have friends who have done it, and it's not that hard. Put together an LLC for a few hundred bucks, reach out via your network for clients (Or conversely, start building a network), read up on sales and business administration, and just do it. You don't need to "front capital", or work s…
The math works out. I, specifically, am better off as an employee. I already took my shot at self-employment and blew it. I won't get another. I'm lucky that I even got one.
If I still lived in an area with more potential customers, with more money, the story might be different. If I wasn't absolutely crap at sales and administration, the story might be different. If I were better able to build a network, such by being more attractive or having better social skills, the story might be different. If I weren't still paying off debts from the first time around, the story might be different. But it's not.
I'm not blaming bureaucracy. It's me. I cannot run my own business. I tried it once already, in the Chicago market, which should be plenty big enough for anyone with an iota of business ability, and it didn't work out. It was a dismal failure. Nobody wanted to hire me. Nobody wanted to refer me. I couldn't get the customers. Therefore, I must have zero business ability--not an iota; zero. If a bunch of money magically dropped into my lap to start a business, I would still have to hire someone else to get me customers. But without already having a customer, I could not afford to hire that person. Easier all around to just find a person that does that already and be their employee.
Do you understand this? Can you fathom how a person might have one valuable skill and be completely unable to exploit it alone? What would you say the difference would be between an aircraft designer that worked as an employee for Boeing or Airbus and one that sold mail-order kits to hobbyist pilots? The former has a whole bunch of people multiplying the value of their labor, and probably gets a smaller share of the gross revenue. The latter might get 75% of their sales, and still make less total.
Besides that, people don't like me. You may underestimate how important that is in the realm of economics. People prefer to give money to other people that they know and like, rather than the people they don't. I know there are loads of resources out there on how to get other people to like you, but it seems like they all rely on some secret sauce that I just don't have.