Hacker News Board Hacker News, browsed like a classic message board
Live data from Hacker News

Stripe faces $3.5B tax bill as employees' shares expire

bloomberg.com

Post reply on HN
Print view View original

21–30 of 396 posts

Re: Stripe faces $3.5B tax bill as employees' shares expire

#21

Post by zamnos »

bzax wrote: post #8
raylad wrote: post #3

I'm not following why there is a tax bill. If the stocks are founder stock or RSU, then the employee should have done an 83b election to avoid paying tax as they vest. If they are options, then the employee is under no obligation to exercise them, and owes no tax until they are exercised. What am I missing?

If you do an 83b election on RSUs, you'd recognize the entire present value of the RSU grant as income in that year, and pay taxes on it. I believe you're then limited to claiming capital losses on that if you leave before it all vests, or it all ends up worthless. Stripe was already worth $9B in 2016. If you joined then, it could have been prohibitively expensive to do an 83b election. The whole point of RSUs is tha…

> Thus far no successful tech company (that I know of) has screwed over its employees by casually choosing not to have a liquidity event

It depends on if you want to rank Foursquare as "successful", but they recently did that, and it was big news in the don't-let-RSUs-expire community.

https://www.theinformation.com/articles/the-private-tech-com...

Re: Stripe faces $3.5B tax bill as employees' shares expire

#22

Post by noahmbarr »

(Uninvolved growth-stage CFO perspective)

The IRS mandates that stock option grants expire after 10 years. My best guess is these early employees are quickly approaching those grants' 10 year mark, and face an exercise or "lose it" situation.

If you exercise, you have to pay the gain. For early employees, this could/would be a massive bill -- probably well into the 7-8 digit range for some early hires.

Stripe seems to be teeing up a secondary sale of these stocks themselves -- where Stripe is offering to buy some of their shares back from those early employees, allowing the employees to exercise ('buy") all of those early options and (at least) pay their tax bill.

Usually, a company will limit the # of shares eligible for a secondary purchase so current/former employees can buy all the stock, sell enough to the company to cover that person's resulting tax bill, and keep the remaining stock until IPO. By limiting the # of shares they will allow to be purchased via the secondary, Stripe will almost certainly make sure the secondary does not create post-tax cash gains to make people wealthy!

It doesn't have to be that way:

Stripe could allow ANY investor to buy the shares directly from those employees -- but guessing Stripe has a blocking right on stock transfers-- so they have, and will continue to block early employee sales to new investors. Stripe and many companies have these transfer "veto right" to make sure they can control their ownership ("cap table") and also to make sure early employees don't get rich before the IPO.

This is my best guess-- I am not familiar with the Stripe's situation.

Re: Stripe faces $3.5B tax bill as employees' shares expire

#23

Post by zamnos »

kjellsbells wrote: post #17
s1artibartfast wrote: post #13

Earlier quoted context omitted.

That may be the case if you're employee number 10, but if the company already has a high valuation you're in trouble

Making sure I get your point: if I get a job at a mature company, like amazon, and they give me, say, 100k in stock options, then AIUI filing a 83b would be painful as I'd owe taxes on 100k even before they vest. But as the stock vests, isnt that treated as income and taxed anyway? And then taxed again if I sell (as capital gains)? If so then it comes down to a gamble of whether the stock is going to go up by the tim…

But as a mature company, Amazon's stock price is not likely to undergo huge swings. Thus you wouldn't file an 83b. However, a startup aiming for unicorn status will have a huge inflation in valuation on the way to being a unicorn (and beyond). If you're unlucky, doing an 83b early exercise will hit right as the valuation jumps, leaving you with a five figure tax bill. I mean, that's better than, say, an eight figure tax bill, but taking a five figure risk so early on in a companies life cycle when there's not even a proven product market fit is, well, risky. If you're in a place where losing that kind of investment because of a remotely possible potential upside, your risk tolerance is simply higher than mine.

The other thing to consider is your vesting timeline. As you vest, you'll owe additional taxes, which means a sizable tax bill before there's been a liquidity event. If you are rich enough to afford that then hey, go for it. But not everyone is in a position to be able to do that.

Re: Stripe faces $3.5B tax bill as employees' shares expire

#24

Post by toomuchtodo »

olliej wrote: post #16

Oh, look another train wreck caused by a non-public company offering "equity" based compensation.

The knife cuts both ways. Just as these stories exist, there are plenty of folks who have fell into life changing or generational wealth through equity comp. Treat it for the lottery ticket it is.

Re: Stripe faces $3.5B tax bill as employees' shares expire

#25

Post by s1artibartfast »

kjellsbells wrote: post #17
s1artibartfast wrote: post #13

Earlier quoted context omitted.

That may be the case if you're employee number 10, but if the company already has a high valuation you're in trouble

Making sure I get your point: if I get a job at a mature company, like amazon, and they give me, say, 100k in stock options, then AIUI filing a 83b would be painful as I'd owe taxes on 100k even before they vest. But as the stock vests, isnt that treated as income and taxed anyway? And then taxed again if I sell (as capital gains)? If so then it comes down to a gamble of whether the stock is going to go up by the tim…

AIUI, If you file 83b you dont pay any taxes when the the options vest. You own the stock in clear. You still pay capital gains if you sell the stock and realize profit.

You need an 83b if you think the stock will vest before you can sell it. Imagine having $10M of stock vest, no option to sell it, and no way to pay the tax on it.

It is a weird artifact of the way vesting triggers taxation of unrealized gains and it fucks people all the time.

Re: Stripe faces $3.5B tax bill as employees' shares expire

#26

Post by s1artibartfast »

bzax wrote: post #18
s1artibartfast wrote: post #12

Earlier quoted context omitted.

Can they not just let the old RSU was expire and provide new grants with an equivalent number of shares? That prevent the tax on exercising non liquid shares. Similarly, why not just offer to buy the stock back at current valuation and leave it up to the employees to settled any taxes

They certainly can let the old RSUs expire worthless, but holding up the "social contract" (as opposed to the strict legal contract) with their employees (and former employees!) while also not drawing the ire of the IRS may be a challenge. If you give new RSU grants, what time period do they vest over? What happens to current employees who leave before then, if they are required to re-earn-out their comp? What can yo…

I don't think the company would be in trouble with the IRS if the rsu's are not exercised. I also don't think it would be breaking the social contract if the employees were granted new replacement rsu's with term limits that aren't contingent on employment. It's not that different then unemployed sitting on vested stock waiting for an IPO or liquidity event.

Maybe I don't understand something in the tax law, which is entirely possible.

Whether this is a good deal for the employees remains to be seen and depends on the spread between the current buyback value and the eventual IPO price.

Re: Stripe faces $3.5B tax bill as employees' shares expire

#27

Post by olliej »

toomuchtodo wrote: post #24
olliej wrote: post #16

Oh, look another train wreck caused by a non-public company offering "equity" based compensation.

The knife cuts both ways. Just as these stories exist, there are plenty of folks who have fell into life changing or generational wealth through equity comp. Treat it for the lottery ticket it is.

I would treat it as a lottery if I thought it was a lottery.

But it isn't a lottery. If a startup _chooses_ not to go public then it I cannot realize any compensation from that valuation - given the founders always seem to be able to, why isn't that option available to the rank-and-file employees? Similarly there have been multiple start ups that sold the controlling class of stock off and rendered all other stock worthless.

A startup equity based compensation is only a lottery if the startup allows every employee who is being compensated with "equity" the opportunity to sell their "equity" back to the company at the current market valuation, or as part of the equity exchange in a funding round. Otherwise the value of the equity is determined by the company - what we're seeing here is that Stripe has realized that their scam compensation is running the risk of now actively harming their employees rather than just ripping them off. Stripe doesn't need to do any tax funding BS to "help" its employees: it just has to buy back the RSUs that are scheduled to expire at their apparent face value. The tax problem that employees are being faced with is entirely a result of stripe refusing to actually pay employees what they have earned.

Re: Stripe faces $3.5B tax bill as employees' shares expire

#29

Post by rcme »

zamnos wrote: post #23
kjellsbells wrote: post #17

Earlier quoted context omitted.

Making sure I get your point: if I get a job at a mature company, like amazon, and they give me, say, 100k in stock options, then AIUI filing a 83b would be painful as I'd owe taxes on 100k even before they vest. But as the stock vests, isnt that treated as income and taxed anyway? And then taxed again if I sell (as capital gains)? If so then it comes down to a gamble of whether the stock is going to go up by the tim…

But as a mature company, Amazon's stock price is not likely to undergo huge swings. Thus you wouldn't file an 83b. However, a startup aiming for unicorn status will have a huge inflation in valuation on the way to being a unicorn (and beyond). If you're unlucky, doing an 83b early exercise will hit right as the valuation jumps, leaving you with a five figure tax bill. I mean, that's better than, say, an eight figure…

The main difference between a company like Amazon and a smaller startup is that Amazon grants RSUs whereas a smaller startup will grant options. The value of options is the (current price - strike price), which will be close to 0 at the grant date. So you can do an 83b election and owe nothing at both grant and vest time.

Re: Stripe faces $3.5B tax bill as employees' shares expire

#30

Post by fatnoah »

s1artibartfast wrote: post #14
fatnoah wrote: post #11

Earlier quoted context omitted.

They way I'm reading the article is that there are employees that would incur large tax liabilities by exercising their options, but have no way to sell those option, so Stripe is looking to cover those taxes. Whether those employees may or may not have been able to ameliorate this by making an 83b election is moot at this point. They clearly didn't, so now something has to happen if the company wants to keep them ar…

I can't read the whole article but are they planning to buy back some of the stock to cover the tax, or simply pay it as some kind of a perk. Edit: after reading the archive link, it seems that the former case is the most likely.

Yeah, I think it's the former, so it'll feel more like "sell to cover" for the employee. I'd have to imagine that paying it as a perk would trigger its own tax liability.
Post reply on HN