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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

#321

Post by antiviral »

saas_co_de wrote: post #27
ajmurmann wrote: post #13

Earlier quoted context omitted.

I can't overstate how sad it would be if the goal of this change was plainly to stick to to Democrat states. It there is truly do much disdain that didn't boat well for the future as a united country.

The entire tax bill seems to be sticking it to Democrat states, in particular New York and California, but it is really about urban vs. rural politics. Democrats have become too concentrated as a party in urban areas and so rural voters have gotten enough political power to attempt to address what they view as economic inequities in the current urban/rural income distribution. Republican have also flipped the script…

There are two problems with this narrative:

1. As already mentioned, it helps ultra-wealthy and people in red states at the expense of the blue states. But by crippling the tech economy, the govt. would harm their own long-term ability to collect tax revenue to invest in other states. Right now, CA provides more tax revenue than it takes back and this money pays for federal govt. projects elsewhere.

2. Many people would get bankrupted simply by vesting. It's one thing to tax people once they have money. But most options are not liquid. Many people would simply not have money to pay for options that they cannot sell and will not be able to wait for some hypothetical IPO or buyout.

Let's just be honest about what this is: it's a vindictive and cynical move to harm the economies in blue states and only marginally help those in red states, and then only in short term (until the tech economy in the US contracts and moves elsewhere).

If this passes, I hope those who support it enjoy their feeling of revenge, because that's all they'll end up with. The rest of us in tech sector will just find another place to grow our business.

Re: Don’t Tax Options and RSUs Upon Vesting

#322

Post by CapnCrunchie »

sulam wrote: post #229
hatred wrote: post #218

Earlier quoted context omitted.

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…

I worked for a company where RSUs did not vest until liquidity event. There were a lot of earned options that people still haven't been able to exercise. People that have been there for over 8 years. I just forfeited mine and moved on to a different company.

Re: Don’t Tax Options and RSUs Upon Vesting

#323

Post by kelnos »

seattle_spring wrote: post #14

I'm 90% certain that "taxing stock options upon vest" only refers to non-qualified stock options. ISOs, which the majority of startup tech employees with incentive options get, would not be taxed upon vest. RSUs and NQOs would fall under the new definition, and holders would be screwed. I just want to make sure we all have our definitions straight.

This doesn't really affect RSU vesting much for publicly-traded companies. Under the current regime, RSUs are taxed on delivery; for a publicly-traded company RSUs are usually delivered at vest time.

I don't object to taxing NSOs at vest time all that much; for rank-and-file employees ISOs are the norm, and NSOs are usually for highly-compensated execs whose grants easily pass the ISO per-year vesting cap. They're the kinds of people who are likely to be able to afford these taxes without liquidity, and who are probably able to take advantage of a bunch of other tax loopholes anyway.

The downside there is for companies that give employees more than 90 days after termination to exercise their ISOs (which by law must be converted to NSOs after 90 days)... I imagine that conversion might trigger a taxable event under these new laws.

Re: Don’t Tax Options and RSUs Upon Vesting

#324

Post by SeoxyS »

There are various ways of getting around this tax even if the plan passes:

- Provide compensation through LLC membership units which vest but have no value at the time of grant. - Allow early exercise of options when the spread is zero.

Re: Don’t Tax Options and RSUs Upon Vesting

#325

Post by kelnos »

briandear wrote: post #160
dmode wrote: post #110

Earlier quoted context omitted.

What about property tax deduction? Why isn't that on the table if you are concerned about fairness. Texas has some of the highest property tax rates in the country. Why not focus on that deduction?

I was referring to all state and local deductions. At the end of the day, the same income should pay the same federal tax. What states choose to do is their business. My point is that states ought not benefit or be discriminated against based on their tax policy. My federal tax bill ought not be different because of the state I live in. I actually live outside the United States, yet I get to file and pay taxes subsid…

> At the end of the day, the same income should pay the same federal tax.

I suspect you say this with the belief that things like state/local tax deductions are unique in how they cause the same income to pay different tax, but that's simply not true, and there's precedent littered across the federal tax code that enables this. Consider simple things like dependent exemptions and the difference between filing status (single, joint, separately, head of household) that can change how much tax you owe even if you earn the same income.

Re: Don’t Tax Options and RSUs Upon Vesting

#326

Post by kelnos »

chimeracoder wrote: post #233
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…

> if the company tries, they'll be treated as NSOs for tax reasons, which defeats the whole point.

How does that defeat the whole point? The entire point of ISOs is that you can exercise without being taxed immediately. After leaving a company, I would much rather have NSOs that I can hold onto, unexercised, until after a liquidity event when the alternative is having nothing.

(I mean, really, though, overall the need for ISOs is ridiculous: the US is insane for taxing unrealized gains in the first place.)

Re: Don’t Tax Options and RSUs Upon Vesting

#327

Post by kelnos »

sanj wrote: post #169

What happens when your vesting options are underwater? Do you get to claim them against your taxes? If so, given the rate of startup failures , this may be of net benefit to most startup employees.

It's fairly uncommon that your options will be under water when they vest, even in a startup that eventually fails. The more common -- and more crappy scenario should this law pass -- is getting taxed on a paper gain, and then later the price drops below the tax basis due to a down-round or something else bad.

Re: Don’t Tax Options and RSUs Upon Vesting

#328

Post by sk5t »

jalonso510 wrote: post #289
hamburglar wrote: post #271

Earlier quoted context omitted.

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.

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…

My employer has issued _all_ option grants as NQSOs (with "normal" 4 year vesting, but also with 90 day exercise or forfeiture, with FMV clawback right, with rather tepid spread between preferred and common after seed). I'll be charitable and suppose the big old law firm wrote this out of startup inexperience and a very strong dose of CYA. Any suggestions on what to do about this?

Re: Don’t Tax Options and RSUs Upon Vesting

#329

Post by kelnos »

xfactor973 wrote: post #36

I don’t quite follow how this is different. When I got rsu’s at my former company they sold a bunch at every vest date to pay for taxes. Isn’t that the same as what they’re talking about here?

RSUs are a little different: they're currently taxed on delivery, not vest. When you work for a public company, vest and delivery dates are nearly always the same, so it seems like they're being taxed at vest time.
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