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Don’t Tax Options and RSUs Upon Vesting

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Re: Don’t Tax Options and RSUs Upon Vesting

#271

Post by hamburglar »

jalonso510 wrote: post #258
hedora wrote: post #248

Earlier quoted context omitted.

It is not the strike price or the exercise price. It is more-or-less the fair market value of the options when they vest, but if you need to compute your taxes, consult an accountant. (Yes, this rule is terrible for planning, because you don’t know what fraction of your shares are ISOs until they vest). Today, ISO’s are commonly given to engineers at pre-IPO startups. Nothing says they have to go to execs. Those engi…

"It is not the strike price or the exercise price. It is more-or-less the fair market value of the options when they vest, but if you need to compute your taxes, consult an accountant" This is not correct. The $100k threshold is calculated based on the fair market value of the option at the time of grant , which by definition is the exercise price. So you calculate how many shares you will vest in each year, multipli…

What reasons might an early stage company (founders + 3 employees, say) have for giving the employees NSOs instead of ISOs? I was once in this situation and everyone I spoke to about it thought it was a flat-out mistake on the company's part, but I've always wondered if there was another reason.

Re: Don’t Tax Options and RSUs Upon Vesting

#272

Post by sulam »

loeg wrote: post #255
sulam wrote: post #188

I'm going to say something that may be unpopular. Hopefully my karma can handle it. The latest analysis I saw of this from Fenwick says that this is only applying to non-qualified stock options. Employees get NSOs when you vest too much to get ISOs in a calendar year, based on the vesting schedule and value at the time of grant, not fair market value at time of vesting of the option. That limit is $100K, for people w…

Also — I don't see any problem with forcing companies to compensate employees in cash instead of employer equity. Especially for publicly traded companies, employees can go ahead, turn around and plow that cash into company stock if they want to. (RSUs are just cash in the form of stock anyway.)

>RSUs are just cash in the form of stock anyway.

That’s an interesting point. They are and they aren’t. Cash as in actual dolla dolla bills they are not. Cash in terms of GAAP liabilities they are. But “stock-based compensation” is generally the largest part of what public tech companies exclude when they report non-GAAP earnings. And the lion’s share of those will be RSUs.

Why do companies think this is a reasonable way to report? (Other than simply trying to look better for non-experts who don’t know how this stuff works.) The most obvious reason from my perspective is that this is a variable cost that is already baked into the model. The variable part is obvious — if I make a promise to give you 300 shares the value side is going to change over time. If our earnings are crappy and everyone sells the stock (to who?!) then the value of your compensation has just dropped. The cost side is also weird — these shares aren’t bought on the open market at time of vest, they are in employee pools that are set aside ahead of time (in fact my understanding is that the usual terms of an RSU require the stock to be set aside at time of grant). So theoretically they should cost whatever the fair market value is at the time the pool was created. Either way they aren’t cash that left the company’s bank account and went to the employee, like regular compensation.

Accounting is hard!

Re: Don’t Tax Options and RSUs Upon Vesting

#273

Post by icebraining »

s73ver_ wrote: post #256
icebraining wrote: post #237

Earlier quoted context omitted.

Sure, but who said we should simply "trust" that?

That's the implicit suggestion behind the entire options thing. Especially given that almost no individual developer has a bargaining position strong enough to demand the safeguards that would avoid those problems.

Look, people still gets big payouts, even if many get stiffed. One can still rationally take the leap even knowing that the game is rigged.

Re: Don’t Tax Options and RSUs Upon Vesting

#274

Post by dmoy »

exelius wrote: post #171
austenallred wrote: post #18

The importance of this change can’t be understated; this effectively kills compensation at startups in the form of equity, and would make startups completely unable to compete with incumbents. Anyone that has options at a company that grows quickly would be paying tens or hundreds of thousands in taxes to keep their equity, which is still effectively a very risky bet that a company will end up huge. No one would want…

> No one would want options anymore, which would make it impossible for startups to compete with large, cash-rich incumbents. You're right; nobody would want options. So we have to start paying people in actual shares if we want to give equity. Which means you have to give employees way more of the company than deep-pocketed investment bankers who will still invest -- despite their temper tantrums to the contrary --…

> But the current model of venture financing is largely dead regardless of whether this change goes through. It's already being replaced by cryptocurrencies / ICOs, which seem like a far more sensible method of issuing restricted stock in excess of the SEC's limitations (since the right crypto / wallet scheme for something like this would not be anonymous). I think ultimately, cryptocurrencies are going to replace RSUs, but the cryptocurrencies that replace RSUs will probably have many of the same governance restrictions as RSUs.

Is this true? I thought (perhaps incorrectly, naively) that one of the whole points of private equity being locked down and unable to sell/liquidate was just that - so that it can't be sold/liquidated. Any solution that makes it liquid goes against one of the original purposes, and thus isn't likely to happen.

Re: Don’t Tax Options and RSUs Upon Vesting

#275

Post by akhilcacharya »

ihsw2 wrote: post #191
kstrauser wrote: post #157

Earlier quoted context omitted.

I don't think it's an unintended consequence. I think it was meant to punish Big Tech for their resistance to the Republican party in the 2016 election.

That is another hunch that I was considering posting but personally I'm skeptical of this. While immigration reform may have fell on its face due to opposition from tech firms, I find it hard to believe the Trump administration would conceive such an effective means of targeting them. It stands to reason that they recognized NSOs/ISOs being used heavily (perhaps more than anyone else) by tech firms but this just seem…

> The estate tax is being retired so this seems to balance it out.

So taxes on people that work for a living are raised to pay for eliminating the estate tax multi-millionaires?

Re: Don’t Tax Options and RSUs Upon Vesting

#276

Post by zwily »

sulam wrote: post #188

I'm going to say something that may be unpopular. Hopefully my karma can handle it. The latest analysis I saw of this from Fenwick says that this is only applying to non-qualified stock options. Employees get NSOs when you vest too much to get ISOs in a calendar year, based on the vesting schedule and value at the time of grant, not fair market value at time of vesting of the option. That limit is $100K, for people w…

Thanks for this. I suspect that for most of the situations where people were (mistakenly) freaking out about their ISOs being taxed on vest, they will actually be much better off given the removal of AMT in the bill.

Re: Don’t Tax Options and RSUs Upon Vesting

#277

Post by sulam »

hamburglar wrote: post #271
jalonso510 wrote: post #258

Earlier quoted context omitted.

"It is not the strike price or the exercise price. It is more-or-less the fair market value of the options when they vest, but if you need to compute your taxes, consult an accountant" This is not correct. The $100k threshold is calculated based on the fair market value of the option at the time of grant , which by definition is the exercise price. So you calculate how many shares you will vest in each year, multipli…

What reasons might an early stage company (founders + 3 employees, say) have for giving the employees NSOs instead of ISOs? I was once in this situation and everyone I spoke to about it thought it was a flat-out mistake on the company's part, but I've always wondered if there was another reason.

Almost certainly a mistake. The only way I can imagine is if the company was pulling a fast one on employee taxes. If you’re a 1099 contractor, you pay your own taxes and are not eligible for ISOs.

Did you get W-2s with withholding at this place?

Re: Don’t Tax Options and RSUs Upon Vesting

#278

Post by sk5t »

rsynnott wrote: post #174
exelius wrote: post #171

Earlier quoted context omitted.

> No one would want options anymore, which would make it impossible for startups to compete with large, cash-rich incumbents. You're right; nobody would want options. So we have to start paying people in actual shares if we want to give equity. Which means you have to give employees way more of the company than deep-pocketed investment bankers who will still invest -- despite their temper tantrums to the contrary --…

> So we have to start paying people in actual shares if we want to give equity. People wouldn't want that either; they'd still have to pay tax on shares that were, for practical purposes, worthless at time of issue (and time tax due) and would statistically probably always be worthless. Under this system, you'd really have to abandon compensation with stock of any sort for non-publicly traded entities.

I suppose this only works if the IRS can be convinced that compensation value of vested options in an illiquid stock with very significant odds of perpetual $0 cashout also tend towards $0. A recipe for a very uncomfortable valuation talk...

Re: Don’t Tax Options and RSUs Upon Vesting

#279

Post by austenallred »

s73ver_ wrote: post #200
austenallred wrote: post #159

Earlier quoted context omitted.

Find them for me, and I'll hire them and pay you a referral bonus.

Go outside the Valley.

We hire remotely. It's not the instant solution to all problems, despite what HN would have you believe. A lot of experience is still concentrated and SV and highly-compensated.

Re: Don’t Tax Options and RSUs Upon Vesting

#280

Post by conanbatt »

GeneralTspoon wrote: post #134
conanbatt wrote: post #64

Earlier quoted context omitted.

The main problem i see with the equity system is that its absolutely intransparent in terms of cap tables and preferred shares. To the very least, if companies were forced to give out cap tables, or at least, a calculator that gives you your payout based on the company sell out cases, you would be able to measure it. Right now, the calculation is complicated and obsfucated for employees. Lets say you have 1% of stock…

It seems completely absurd to me that preferred shares exist, and one of the reasons I always hesitate whenever I'm offered equity. For anyone curious, here's a good explaination: https://www.capshare.com/blog/how-preferred-stock-affects-th... They basically shift a lot of downside risk from the preferred share owners (usually a VC firm I guess) to the founders and employees in the startup, which in theory makes them…

I made another comment about them below, but i will repeat in a different way.

People have their own assessment of what is valuable, and getting exactly what they want means they are willing to part with as much utility. A person that loves sandwiches with blue cheese is willing to pay more for that cheese than he would with the a regular sandwich.

The existence of blue cheese sandwiches is moderately irrelevant to the existence of regular sandwiches. And banning them would only increase the price of regular sandwiches and also make those people less happy. Less sandwiches would be sold.

Preferred shares don't really hit common shares. If you knew exactly how it went, then you would make an assessment of the value of the shares as they are. Your internal valuation of sandwiches will adjust to the existence of blue cheese sandwiches.

The reason why they feel unfair, and they are unfair in this sense, is that the guys with preferred shares know what they are getting, and you dont. And also, as an employee you dont get to buy preferred shares. If you dont know the price of blue cheese sandwiches and you can't buy them, you will find them unfair. Banning sandwiches is not the solution to the problem.

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