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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

#301

Post by hkmurakami »

econner wrote: post #297
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…

The problem though is that if you have ISOs they usually have to be exercised within 90 days of departure from a company. Some companies are extending that deadline to 7 years, but the IRS disqualifies ISOs 90 days after departure so they have to convert to NSOs. So this would prevent companies from providing an option extension.

I thought about this, and if the taxation trigger is "tax upon vesting", and the vesting is done when the options are ISOs, I would think that it is possible that this legislation is worded in a way so that an ISO -> NQO conversion does not trigger a tax event.

Re: Don’t Tax Options and RSUs Upon Vesting

#302

Post by kelnos »

GeneralTspoon wrote: post #134
conanbatt wrote: post #64

Earlier quoted context omitted.

The main problem i see with the equity system is that its absolutely intransparent in terms of cap tables and preferred shares. To the very least, if companies were forced to give out cap tables, or at least, a calculator that gives you your payout based on the company sell out cases, you would be able to measure it. Right now, the calculation is complicated and obsfucated for employees. Lets say you have 1% of stock…

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…

> 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 more likely to invest in more startups. But in the long term, this seems like it consolidates captial (which is generally a bad thing IMO).

I'm torn on this. I agree that, in general, capital consolidation isn't a good thing. But you have to consolidate somewhat. If a startup founder has to deal with 100 separate investors to put together enough cash for an A round, that's a huge problem. Consolidation of some amount of capital into VCs helps with that.

The VCs, when it comes to money, are also taking on much more risk than the option-granted employees are taking on. As a sibling poster mentioned, though, you really need to make a distinction between participating and non-participating preferred stock. The former is super bad for founders and employees, but these days it seems like the latter is the norm, except for perhaps in medical/biotech startups. It gives the VC a better chance of recouping their initial investment in the case that the company sells for an unfavorable amount. If the company is successful, they'll almost certainly convert their shares to common and take no more of the pie than they're entitled to.

Re: Don’t Tax Options and RSUs Upon Vesting

#303

Post by hkmurakami »

sulam wrote: post #292
jalonso510 wrote: post #289

Earlier quoted context omitted.

Only a couple or reasons they'd deliverately do that. Most common is if the employee is outside the U.S. and not a U.S. taxpayer, making the distinction irrelevant. 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 e…

I've heard of longer exercise periods for ISOs, although these were while still employed. Is the 90 days post-termination encoded into law?

those convert to NQOs after 90 days. It's coded into law.

Re: Don’t Tax Options and RSUs Upon Vesting

#304

Post by rrhd »

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).

> low-risk way

Unless it goes bankrupt or has some other issue and you don't get paid or get fired.

I do not like this idea that startup employees aren't taking a risk. It encourages extremely one sided behavior.

Re: Don’t Tax Options and RSUs Upon Vesting

#305

Post by ryandrake »

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 don't know--maybe startups and small businesses will just have to go find a better way to be competitive compensation-wise. Today, they get to lure people in with an insufficient cash salary plus "free" equity lotto tickets, perpetuating the "jackpot or nothing" environment. I don't know what the solution is but it would be nice if a creative alternative could be found.

Re: Don’t Tax Options and RSUs Upon Vesting

#306

Post by thanatropism »

loeg wrote: post #257
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…

> would make startups completely unable to compete with incumbents. They already are mostly unable to compete with larger companies on total compensation. Startup equity is worthless unless you win the lottery. https://danluu.com/startup-tradeoffs/

The Joel on Software post cited on your link is just too good.

https://www.joelonsoftware.com/2008/05/01/architecture-astro...

> Jeez, we’ve had that forever. When did the first sync web sites start coming out? 1999? There were a million versions. xdrive, mydrive, idrive, youdrive, wealldrive for ice cream. Nobody cared then and nobody cares now, because synchronizing files is just not a killer application. I’m sorry. It seems like it should be. But it’s not.

Re: Don’t Tax Options and RSUs Upon Vesting

#307

Post by kelnos »

conanbatt wrote: post #295
GeneralTspoon wrote: post #287

Earlier quoted context omitted.

I'm not so sure about the analogy, but I get your point. 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…

If it were of public knowledge that when a company IPO's, employees in total collect less than 10% of the gains, the public outrage would soon ban the practices that we see everyday. Today we have a lottery where we dont know the winners and so they are protected. I dont have animosity against investors for protecting their gains, that is fine (for them, ofc, but they are reacting to their incentives). The main reaso…

> If it were of public knowledge that when a company IPO's, employees in total collect less than 10% of the gains, the public outrage would soon ban the practices that we see everyday.

What do you mean? Of course this is public knowledge. Anyone accepting an equity grant as an employee who doesn't know this isn't doing their due diligence.

Asking about the cap table of a small startup while interviewing is an entirely reasonable thing to do, and I've immediately discounted an interview at a company where they've been cagey about giving me details. I mean, I'm fine with them not breaking it down into what percentage each investor owns, but telling a prospective employee how much of the company in total is owned by VCs vs. founders vs. employees/option pool is pretty uncontroversial.

> If you as an employee were able to buy and sell the shares with liberty, companies would almost immediately make cap tables public to get cheaper funding from the general public.

This doesn't really make sense. You've just described a publicly-traded company, and obviously an early-stage startup can't afford to be one of those.

Re: Don’t Tax Options and RSUs Upon Vesting

#308

Post by kelnos »

maerF0x0 wrote: post #164
eldavido wrote: post #16

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.…

>What's really needed is a way some group of insiders in a company can transfer shares among themselves or outsiders. This would probably take a big change in securities laws to create rules around how unaudited equities could be traded. Most option/stock agreements give the company right of refusal and they can block sales >They don't grant stock, they simply pay cash (bonuses) and if employees want to buy in, it's…

>> They don't grant stock, they simply pay cash (bonuses) and if employees want to buy in, it's their money

> Doesnt work for private companies, there's no market to buy them in

Personally I'd like to see more employee profit-sharing arrangements. Difficult for a lot of companies though that run at a loss for years.

Re: Don’t Tax Options and RSUs Upon Vesting

#309

Post by kelnos »

pc2g4d wrote: post #152
hatred wrote: post #96

Earlier quoted context omitted.

Yeah, mostly applies to pre-IPO companies offering stock options/RSU's.

Large publicly-traded companies can also offer RSUs---doesn't this still apply in that scenario?

In practice, RSUs already work that way: you're taxed on RSU delivery, which in the case of a public company is almost always the same as the vest date. Usually the company will sell a portion of the RSUs vested to do tax withholding on the spot, and then you're immediately free to hold or sell the remainder.

I the case of a private company, RSU vesting/delivery means you owe taxes but (usually) can't sell them to pay for it, which is (also) no different from today.

Re: Don’t Tax Options and RSUs Upon Vesting

#310

Post by kelnos »

bdamm wrote: post #150
10dpd wrote: post #137

Earlier quoted context omitted.

You're describing how things are now and have missed the point - this bill will mean that you will have to pay tax on vesting.

Am I? I thought I was providing supporting evidence for the adjustment of when "vest" actually occurs.

That's not supporting evidence; your believe is incorrect. Vesting is unrelated to liquidity and can occur without the ability to sell shares.
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