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

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

#141

Post by WatchDog »

matchagaucho wrote: post #129
noahmbarr wrote: post #22

(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 t…

IIRC there's still a limit of 2,000 shareholders for private companies. So if those employee options transfer to outside buyers, they potentially hit the 2K limit really fast. btw - Nearly this same set of circumstances forced the FB IPO. Dozens of early employees were allowed to sell their shares pre-IPO, triggering the max private shareholder rule.

Dumb question, but does another company count as a single shareholder? Could you setup some kind of SPAC that only owns shares in the given company, to open up another 1,999 shareholders?

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

#142

Post by caseysoftware »

tyre wrote: post #136
konfusinomicon wrote: post #131

Earlier quoted context omitted.

the biggest joy is that you get it back in the form of a credit over several years, all the while paying interest and fees on the tax bill you cant initially pay because your "gains" are in a private company's stock that you cant sell! I've yet to get a rational explanation of why the current AMT law is fair. sure for some people it makes sense, but for the exercise of ISOs in a private company, it's basically robber…

It’s fair because otherwise you could compensate people for zero tax. For example, you have a CEO that can either be paid: 1) $1m in cash 2) $1m in stock 3) an option grant to buy 1m shares at $0.000001. Each share has a FMV of $1. Without AMT, you could always take (3) and they would get $1m of stock for $1. Tax free.

With (3), they'd be taxed on the gains when they sell. Not "tax free" at all.

The difference is that they wouldn't be taxed until the gains were realized not when they were imagined on paper.

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

#143

Post by sillysaurusx »

noahmbarr wrote: post #22

(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 t…

Could anyone translate this into “The early employees will get wealthy from this” or “they’ll get slightly more than they would’ve gotten from getting a job at BigCo over 4 years”?

My problem with equity grants is that everyone treats them like they’re so valuable, when in fact the EV is usually close to zero. That wouldn’t be so bad if the upside was really good, but dealing with nonsense like this makes them even less attractive.

The whole point of working at a startup — of working very hard, instead of coasting — is to increase your standing in life. Some people care about skill set (you learn a lot more in a startup) but you end up a lot more stressed.

Stripe’s early employees are in the best possible scenario, short of winning the lottery: they joined a unicorn early. If they don’t come out of it with lots of after-tax cash, then that calls into question why to even work at one. Unless you really love hard work without proportional reward, logically you wouldn’t choose that path — pg said as much in many of his essays.

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

#144

Post by caseysoftware »

WatchDog wrote: post #141
matchagaucho wrote: post #129

Earlier quoted context omitted.

IIRC there's still a limit of 2,000 shareholders for private companies. So if those employee options transfer to outside buyers, they potentially hit the 2K limit really fast. btw - Nearly this same set of circumstances forced the FB IPO. Dozens of early employees were allowed to sell their shares pre-IPO, triggering the max private shareholder rule.

Dumb question, but does another company count as a single shareholder? Could you setup some kind of SPAC that only owns shares in the given company, to open up another 1,999 shareholders?

Not a dumb question at all.

Many angel investors will create pool their money to create an LLC to hold their shares so there's only one investor. It also makes it easier when you need to get "all the investors" to sign off on something. You have ONE signature to get instead of the N angels involved.

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

#145

Post by zamnos »

sillysaurusx wrote: post #143
noahmbarr wrote: post #22

(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 t…

Could anyone translate this into “The early employees will get wealthy from this” or “they’ll get slightly more than they would’ve gotten from getting a job at BigCo over 4 years”? My problem with equity grants is that everyone treats them like they’re so valuable, when in fact the EV is usually close to zero. That wouldn’t be so bad if the upside was really good, but dealing with nonsense like this makes them even l…

couldn't some of them have cashed out with the Shopify thing?

https://finbold.com/shopify-reportedly-buys-over-350-million...

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

#147

Post by Apofis »

valzam wrote: post #74
KptMarchewa wrote: post #72

Earlier quoted context omitted.

I don't understand why there's tax on unrealized gains there.

The gains are realised, you just aren't getting cash but company stock. The 'gain' is the difference between option strike price and market value of the shares. Since stripe is privat the market value is a bit murky but that doesn't deter the IRS. EDIT: spelling

What's realized about these gains if the company is blocking the sale of the stock on the secondary market? This is toilet paper these people were duped into thinking was worth something. Sounds more like a lawsuit.

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

#148

Post by danielmarkbruce »

CodeWriter23 wrote: post #104
ztratar wrote: post #83

Earlier quoted context omitted.

Tax liabilities on (optional) employee secondary stock sales is most certainly not a normal business operation.

If your SOP is handing out options, yes it is. I’d also say GAAP likely requires building a cash reserve to cover such liabilities. I’m not an accountant but I’m pretty sure they have to be ready to cover the difference between the option and strike price until the expiry of the option. One would imagine that is less than tax when the option remains unexercised.

It's not a Stripe liability, so no.

GAAP is a set of accounting standards - it doesn't require taking actions, it's about how to record things if you want to meet those standards. So no, there is no GAAP requirement to build a cash reserve. For what it's worth, Stripe isn't even obliged to follow GAAP for their accounting (it is likely they signed a contract somewhere which calls for a set of financials meeting GAAP to be furnished periodically, but again GAAP doesn't require actions, it stipulates accounting entries).

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

#149

Post by [deleted] »

nrmitchi wrote: post #89
choppaface wrote: post #87

Earlier quoted context omitted.

At Uber, employees got loans to cover exercise. Is that not happening here?

Taking out 7-8 figure loans to exercise start-up options in a private company in a time of decreasing valuations and market uncertainty sounds like a pretty poor idea.

[deleted]

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

#150

Post by valzam »

Apofis wrote: post #147
valzam wrote: post #74

Earlier quoted context omitted.

The gains are realised, you just aren't getting cash but company stock. The 'gain' is the difference between option strike price and market value of the shares. Since stripe is privat the market value is a bit murky but that doesn't deter the IRS. EDIT: spelling

What's realized about these gains if the company is blocking the sale of the stock on the secondary market? This is toilet paper these people were duped into thinking was worth something. Sounds more like a lawsuit.

Yes for sure it's a raw deal for the employees, but I think Stripe is planning to enable a secondary market? In any case, we are all adults, they accepted stock options as part of your renumeration. If they don't know the risks then don't work at a private company that offers stock options.

EDIT: That being said, I think it would be reasonable to contemplate regulations that prevent private companies from blocking secondary market sales if they offer stock options/RSUs to employees.

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