House Passes Employee Stock Options Bill Aimed at Startups • Hacker News Board

Re: House Passes Employee Stock Options Bill Aimed at Startups

#11

Post by gshulegaard » Fri, Sep 23, 2016, 12:44 PM UTC

chillydawg wrote: post #3

Nice to see tax laws for the rich can get passed, but substantive change to do with criminal justice, healthcare etc go nowhere.

To be perfectly honest, this bill affects mostly middle class near as I can tell. The following is entirely personal understanding of my own stock option agreement and is subject to mistakes and misconceptions...so someone can feel free to correct me.

The problem this bill targets is the "exercise tax" interaction. Say you are an employee at a start up. Said start up can't afford your full normal salary so they pay you something less but offer you the OPTION of PURCHASING stock in their privately held corporation at a fixed rate (stock options) and often at a "discount" (more on this below).

So a private "board" (of the company) meets and arbitrarily assigns a dollar value to the shares of their company...again this is more or less arbitrary since all stock is privately held so there is no market interaction for price setting. Based on this dollar value, they offer you, the employee, a "discount". So if your board sets a price estimate of $1.50 per share, they might put in your stock option agreement a fixed price of $1.20 per share for X number of shares.

But this means, at least according to tax law, that when you purchase the stock at $1.20, you, the employee, have an IMMEDIATE realized gain of $0.30 per share...lucky you! So this is of course taxable.

Problem being that the current share "value" and the corresponding discount was arbitrarily assigned and actually...you spent $1.20 on a share of a company that has no resale value. So not only do you "buy" (or "invest") into ownership of your start up...you then get taxed on top of it for a "realized gain" that actually doesn't exist. So it's not like you can turn around and sell some of your new "stock" to be able to pay the tax...

Re: House Passes Employee Stock Options Bill Aimed at Startups

#12

Post by asah » Fri, Sep 23, 2016, 12:44 PM UTC

chillydawg wrote: post #3

Nice to see tax laws for the rich can get passed, but substantive change to do with criminal justice, healthcare etc go nowhere.

Troll.

They're independent, eg just because we need to fix roads doesn't mean we should stop funding science.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#13

Post by breerly » Fri, Sep 23, 2016, 12:45 PM UTC

jnordwick wrote: post #10

Most employees get hit by the AMT and the step up in basis when exercising their incentive employee stock options, and from just skimming the bill, I don't see how that is prevented.

I was looking for that language as well - I expected to see that "gains" from exercising options do not count towards AMT, and that related taxes are completely deferred until the time when the investment becomes liquid (or 7 years?).

Re: House Passes Employee Stock Options Bill Aimed at Startups

#14

Post by ones_and_zeros » Fri, Sep 23, 2016, 12:45 PM UTC

breerly wrote: post #5

chillydawg wrote: post #3

Nice to see tax laws for the rich can get passed, but substantive change to do with criminal justice, healthcare etc go nowhere.

This bill simply defers the taxes till actual gains are realized, instead of requiring them when options are exercised. Ideally, this means more employees can actually act on their options, instead of just "the rich" as you imply.

The argument could be made that this is actually a gift to businesses and executives.

Ultimately this bill makes working at a startup more attractive when they are already a pretty poor choice, so we'll just have more people making poor choices and putting themselves at financial risk to the benefit of their employer.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#15

Post by Radle » Fri, Sep 23, 2016, 12:51 PM UTC

chillydawg wrote: post #3

Nice to see tax laws for the rich can get passed, but substantive change to do with criminal justice, healthcare etc go nowhere.

Taxes are only deferred.

This is good for employees NOT for employers.

The current/old method coul create severe Problems for the employee:

People working for an extreme very successfull Startups like Google, Facebook and the like, could become very rich on paper.

Imagine an income of 200 Thousand and quite suddenly 2 Million in Stocks. Now they had to pay taxes on the 2 Million from their normal income, since they couldn't or didn't want to sell their stock Options yet.

200k income 400k taxes? Yes you're fucked.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#16

Post by gshulegaard » Fri, Sep 23, 2016, 12:53 PM UTC

ones_and_zeros wrote: post #14

breerly wrote: post #5

Earlier quoted context omitted.

This bill simply defers the taxes till actual gains are realized, instead of requiring them when options are exercised. Ideally, this means more employees can actually act on their options, instead of just "the rich" as you imply.

The argument could be made that this is actually a gift to businesses and executives. Ultimately this bill makes working at a startup more attractive when they are already a pretty poor choice, so we'll just have more people making poor choices and putting themselves at financial risk to the benefit of their employer.

While this is certainly an argument, I think the bill fixes an unintended interaction in tax law where people were getting taxed for "realized gains" that actually weren't realized...or gains at all (yet).

So an alternative way of looking at it is that this bill removes an _accidental_ disincentive for innovation.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#17

Post by bluejekyll » Fri, Sep 23, 2016, 12:53 PM UTC

gshulegaard wrote: post #11

chillydawg wrote: post #3

Nice to see tax laws for the rich can get passed, but substantive change to do with criminal justice, healthcare etc go nowhere.

To be perfectly honest, this bill affects mostly middle class near as I can tell. The following is entirely personal understanding of my own stock option agreement and is subject to mistakes and misconceptions...so someone can feel free to correct me. The problem this bill targets is the "exercise tax" interaction. Say you are an employee at a start up. Said start up can't afford your full normal salary so they pay y…

This could have been resolved by also removing the 409a rule. Which requires companies to specifiy some arbitrary price that the company is worth.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#18

Post by breerly » Fri, Sep 23, 2016, 12:55 PM UTC

ones_and_zeros wrote: post #14

breerly wrote: post #5

Earlier quoted context omitted.

This bill simply defers the taxes till actual gains are realized, instead of requiring them when options are exercised. Ideally, this means more employees can actually act on their options, instead of just "the rich" as you imply.

The argument could be made that this is actually a gift to businesses and executives. Ultimately this bill makes working at a startup more attractive when they are already a pretty poor choice, so we'll just have more people making poor choices and putting themselves at financial risk to the benefit of their employer.

This makes it so employees can actually participate in the upside of the risk - something that the current tax setup can make impossible for employees of highly valued private companies.

---

I'm Bob, I write a check for $50K to exercise my stock options. They might be worth something some day, I'm taking that risk and working my ass off to see that they are.

The year I exercise the options, the gov sees that I've made a $1.5M "paper gain", and they want their taxes. Call it $300K.

If Bob doesn't have $350K in the bank, he is stuck - he basically needs to wait until said company goes public to make a zero-cash sale, or forfeit his options when leaving (either by quitting or getting fired).

Not to mention if Bob exercised the stock and payed the $350K - the company could never IPO, or it could and tank. Bob wouldn't see any of that money back.

Bob's upside for working at said risky startup is severally limited.

This is a surprise to most employees, who accepted the risk and assumed they would be able to participate in the upside of the startup (kind of the whole point). These employees find out that, in many cases, they can't actually become shareholders, or they do and lose everything.

In concept, this bill would have Bob write the $50K check for the options, and then only pay taxes once and if actual liquid gains were realized.

How does this only affect the rich or somehow incorrectly incentive people to work for startups?

I'm happy for Bob.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#19

Post by rayiner » Fri, Sep 23, 2016, 12:55 PM UTC

harryh wrote: post #8

adanto6840 wrote: post #6

The bill text is here and is pretty easy to decipher: https://www.congress.gov/bill/114th-congress/house-bill/5719

Why all the goofy eligibility rules? Just get rid of the rule where exercising stock options counts as income under the AMT(1). It's line 14 in Part 1 of Form 6251. Just get rid of it! When people talk about our tax system being too complicated bills like this are why. 1. For that matter we should get rid of the AMT entirely. The fact that we have 2 separate tax systems for individuals is insane. That's a bigger stor…

We have 52 different tax systems for individuals by my count. All the states have have different rules too. Last several years, my wife and I have had to figure out our taxes five different ways on the same income.

Re: House Passes Employee Stock Options Bill Aimed at Startups

#20

Post by gshulegaard » Fri, Sep 23, 2016, 12:58 PM UTC

bluejekyll wrote: post #17

gshulegaard wrote: post #11

Earlier quoted context omitted.

To be perfectly honest, this bill affects mostly middle class near as I can tell. The following is entirely personal understanding of my own stock option agreement and is subject to mistakes and misconceptions...so someone can feel free to correct me. The problem this bill targets is the "exercise tax" interaction. Say you are an employee at a start up. Said start up can't afford your full normal salary so they pay y…

This could have been resolved by also removing the 409a rule. Which requires companies to specifiy some arbitrary price that the company is worth.

While I think you are possibly correct...I think removing this is more difficult since it has much deeper implications for private investing. Say some investor wants to invest in your private company, without some sort of 409a company worth...how would you go about negotiation?

To be fair, I oversimplified when I said "arbitrary"...company valuation estimates aren't _completely_ random...they just aren't set by free market interactions.