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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

#11

Post by fatnoah »

raylad wrote: post #6
BlackjackCF wrote: post #4

Earlier quoted context omitted.

Like you said, if the employees filed an 83b, they would be in the clear. However, the article’s talking about some of Stripe’s earliest employees, who might not have elected to file an 83b because the company was still unestablished and risky, and filing the 83b meant potentially paying taxes on shares that might ultimately be worthless. And since these are the company’s early employees, I imagine that Stripe is doi…

If they were the earliest employees the stock should have been at par value, making the tax payment minimal. Later employees typically get options, which don't have the tax issue. So I'm still unclear where the tax bill is coming from.

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 around.

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

#12

Post by s1artibartfast »

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…

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

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

#13

Post by s1artibartfast »

rcme wrote: post #7
BlackjackCF wrote: post #4

Earlier quoted context omitted.

Like you said, if the employees filed an 83b, they would be in the clear. However, the article’s talking about some of Stripe’s earliest employees, who might not have elected to file an 83b because the company was still unestablished and risky, and filing the 83b meant potentially paying taxes on shares that might ultimately be worthless. And since these are the company’s early employees, I imagine that Stripe is doi…

Shouldn't the strike of the options make them worthless at grant time? I was under the impression that the 83b election is awesome because it basically gives you tax free grants.

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

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

#14

Post by s1artibartfast »

fatnoah wrote: post #11
raylad wrote: post #6

Earlier quoted context omitted.

If they were the earliest employees the stock should have been at par value, making the tax payment minimal. Later employees typically get options, which don't have the tax issue. So I'm still unclear where the tax bill is coming from.

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.

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

#15

Post by troygoode »

rcme wrote: post #7
BlackjackCF wrote: post #4

Earlier quoted context omitted.

Like you said, if the employees filed an 83b, they would be in the clear. However, the article’s talking about some of Stripe’s earliest employees, who might not have elected to file an 83b because the company was still unestablished and risky, and filing the 83b meant potentially paying taxes on shares that might ultimately be worthless. And since these are the company’s early employees, I imagine that Stripe is doi…

Shouldn't the strike of the options make them worthless at grant time? I was under the impression that the 83b election is awesome because it basically gives you tax free grants.

This is true for options but not RSUs.

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

#17

Post by kjellsbells »

s1artibartfast wrote: post #13
rcme wrote: post #7

Earlier quoted context omitted.

Shouldn't the strike of the options make them worthless at grant time? I was under the impression that the 83b election is awesome because it basically gives you tax free grants.

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 time the stock vests and whether you happen to have the spare cash around to pay a tax bill.

Am i reading that right?

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

#18

Post by bzax »

s1artibartfast wrote: post #12
bzax wrote: post #8

Earlier quoted context omitted.

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…

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 you do at all about former employees? Will the IRS still accept that this deferred compensation is subject to "substantial risk of forfeiture" and thus the taxes on it can be deferred (see U.S. Code 409A)?

Stripe is trying to do option b), buy back stock at current valuation. To do so, they need to raise a couple billion dollars. That money will go to the employees (in exchange for some stock) so that the employees can settle up their taxes, though the IRS will "cut out the middleman" so to speak, and requires Stripe to simple withhold the proceeds and remit to the IRS on the employees' behalf.

The $3.5B tax bill is not "corporate tax" owed by Stripe, but employee income tax that will be owed by employees if there is a liquidity event, and which Stripe will be, in practice, required to withhold on their behalf if Stripe arrange that liquidity for them.

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

#19

Post by raylad »

bzax wrote: post #10
raylad wrote: post #6

Earlier quoted context omitted.

If they were the earliest employees the stock should have been at par value, making the tax payment minimal. Later employees typically get options, which don't have the tax issue. So I'm still unclear where the tax bill is coming from.

I don't know why you believe later employees get options. It is true that at public companies, employees often are compensated with options, but at "startup"s where the FMV of a new employee grant would be prohibitively expensive to either early exercise or pay income taxes on, employees get RSUs. Options are for small companies, and 83b elections when the exercise price can be paid by the employee upfront. RSU are f…

Someone here is confused, and it might be me. As I understand it:

In a company where the fair market value share price is $1/share, if you get granted 100 options, you owe tax on $0 because options are not taxable.

If you get granted 100 RSUs which are all fully vested, you owe tax on $100 because stocks are taxable. If the RSUs are 0% vested you don't owe any tax yet.

Then, if the share price goes up to $2 a share, you still owe $0 tax on your options, but if you have RSUs and 50 of them now vest, you immediately owe tax on $100 (50 x $2) - unless you did an 83b election and paid taxes on the 100 shares at $1 a share at the time you got the grant.

If you exercise the options, now you owe tax on $200 (100 x $2), whether or not you can sell the stock.

So again, I don't understand why Stripe would have a tax bill under any of these scenarios.

The employees would have a tax bill connected with vesting of RSUs if they had not done an 83b election, but no one else would have any tax due until they (exercise in the case of options) and then sell the stock.

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

#20

Post by junar »

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…

> However, restricted stock isn’t to be confused with RSUs (restricted stock units). RSUs don’t have the option to elect 83b.

https://www.kinetixfp.com/post/should-you-make-an-83b-electi...

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