San Francisco Doing Everything It Can To Drive Zynga And Twitter Away

Kind of what's going on here is that only very successful companies face a large enough impact from the tax that exercising the option of exit is at all attractive. Say your SF startup was being acquired for $50mm, $10mm of which is employee equity hit by the tax (investors and founders don't pay it). You end up having to pay $150k between you, which only now is starting to be a big deal -- even one order of magnitude down, it's not worth the hassle of moving your office to a low tax jurisdiction just to dodge 15k of taxes imposed over 2-5 years -- and of course you have bigger issues to worry about so the tax doesn't matter that much. Spread over 100 or so employees and it looks like a fairly small salary increase to be paid for cost of living reasons.

I faintly recall a discussion of when you should accept dilution (which a tax is) if it raises your chances of success. I tend to assume that startups locate in SF rather than the non-SF bay area for reasons that they feel give them more than a 1.5%*employee equity higher chance of success (shorter commutes for your people, etc.).

More generally, it's only going to be the very large companies that want to exercise their option of exit for this reason: moving sucks and nobody wants to do it. By the time it's millions of dollars in taxes (i.e. valuation > $1bn or so) you'd think about it, but I'd guess not before. So it's not the greatest idea from a tax equity perspective: a tax only the extremely wealthy find it worth their while to dodge is still regressive. Lame capitulations to keep the few companies with this high-class problem in the city are probably correct from a utility-maximizing perspective, if kind of morally distasteful.

There is a reason why people set up in San Francisco even though it costs more. We have an office there, and in terms of both recruiting and business contacts, moving it out of San Francisco would be a waste of money.

We also have an office in NYC -- also not cheap, but totally worth it. Between NYC and SF we have no trouble recruiting employees who want to live in a desirable location (and we, the officers, want to live here too!), and nearly all of our partners and business contacts are either in SF or NYC, too.

It has nothing to do with those companies deserving anything. The problem that is being solved is that if Twitter or Zynga leaves San Francisco and continues to grow and hire people in their new location, that will be used against the current politicians in upcoming elections. Challengers could point to the new jobs being created in another Bay Area city and say, "San Francisco could have had those jobs, but Politician X let them leave. I will make sure we keep the new jobs in San Francisco." On the other hand, if the current politicians give Twitter or Zynga too big of a tax break, they'll get challengers claiming that they gave away the store to these rich companies, along the lins of what some politicians are already saying about any proposed deal. Hence, the negotiations.

The problem with Bart is 1) cloth seats, and 2) a large homeless population. Not a great combination. There's been some talk of replacing the cloth seats with plastic seats, which will be less comfortable but much easier to clean. I'm not as creeped out by bart as you are, but it is kind of gross.

Vancouver is a great city, no question about it. I think San Francisco is bigger, more disgusting, more thrilling, and in my opinion uglier and more beautiful than Vancouver depending on where you're looking. Keep in mind that part of the reason for our homeless problem is that we're a magnet for the cast-offs of an entire nation with less of a support system than you have in Canada - it's not like San Francisco manufactures homeless people in some factory south of market and dumps them out on market street every morning. We're not purely innocent victims in all this, San Francisco has done plenty to earn that magnet status. Every now and then a mayors of some other city starts a kerfuffle by offering homeless people $50 and a one way bus ticket to SF (though SF actually used to bus its own over to Oakland).

I think a very well implemented national health care program can be a competitive advantage. The other things you mentioned seem less important to me, valuable at the margins, but not game changers in any way. It comes down to UBC vs (Stanford + UCSF + UC Berkeley). UBC is a wonderful university, don't get me wrong, but as long as the Bay Area has those three, it will be a huge player in high tech.

> My understanding was the same as yours above, but it seems that if there is a valuation event – an IPO, for example – then the rise in value of all shares is counted, not just the ones which were sold.

Well, that would explain a bit of the whining, but I will need a nice solid citation before I believe a word of it.

First, because I cannot fathom how it could possibly work: What's a qualifying "valuation event"? What if another event comes along and the valuation has dropped -- is the company entitled to a refund, then?

Second, because that would be the only tax scheme I've ever heard of, except maybe some proposed & hair-brained wealth taxes, that directly taxes unrealized gains. (Wealth taxes I'm aware of that actually exist tax unrealized gains under simple growth assumptions, not based on any sort of actual valuation.)

Third, because if that were the case you'd think that the vocal opposition would be able to articulate it more clearly.

> To me, tax becomes unfair if it is arbitrarily applied to some people, but not to others, e.g. letting Twitter and Zynga off, while taxing other start-ups.

Exactly the problem that the options tax was introduced to solve, as well. If there is a tax on employee compensation, why shouldn't the executive compensation of $1 salary + $300 million in options be taxed at the same effective rate as the janitor's wages?

(N.b.: I think a payroll tax is dumb, but a regressive payroll tax is dumber!)

(Edited a bit for clarity & removed a side comment.)