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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

#291

Post by eldavido »

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…

It isn't absurd. You need to distinguish between participating and non-participating preferred. Participating preferred is a lot worse than non-participating, which is always converted into equity in the success case.

The scenario this is trying to block is that entrepreneur raises $1mil for 10% of the company, and it's flipped tomorrow for $5mil. The investor gets 500k=50% loss in one day. It's completely reasonable and fair IMO that an investor should want protection in this case.

What's not reasonable is the way silly SV journalists treat preferred as equivalently-valued as common. It's not, it's worth a lot more, making it incorrect to say that "10% of company is 1 mil => whole company worth 10 mil" when that 10% is preferred. It's probably more like 5 million, or 6. Because that downside protection is _worth something_ so those preferred shares by rights, are worth more than common.

Re: Don’t Tax Options and RSUs Upon Vesting

#292

Post by sulam »

jalonso510 wrote: post #289
hamburglar wrote: post #271

Earlier quoted context omitted.

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.

Only a couple or reasons they'd deliverately do that. Most common is if the employee is outside the U.S. and not a U.S. taxpayer, making the distinction irrelevant. Or, if you plan to early exercise immediately upon receipt, you actually are better off with an NSO (due a shorter holding period for long-term capital gains treatment and there being no spread between exercise price and fair market value at the time of e…

I've heard of longer exercise periods for ISOs, although these were while still employed. Is the 90 days post-termination encoded into law?

Re: Don’t Tax Options and RSUs Upon Vesting

#293

Post by robbomacrae »

zwily wrote: post #276
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.

AMT started off with reasonable intentions but 47 years later it ended up effecting way more people than intended due to inflation. I feel like the $100k limit will end up doing the same.

Re: Don’t Tax Options and RSUs Upon Vesting

#294

Post by vmarsy »

koolba wrote: post #9

> That should be a clear enough example to the lawmakers that vesting should not be a taxable event. Vesting has the unique property that before it occurs the shares are not yours and after it occurs, they clearly are (and can't be clawed back). If you don't tax vesting, are you going to instead wait until the shares are sold to tax them? That would be very easy to abuse. > If this provision becomes law, startup and…

> If you don't tax vesting, are you going to instead wait until the shares are sold to tax them? That would be very easy to abuse.

would you care going in details on why this would be "very easy to abuse"?

In France that's how ISO works:

You have 2 taxable events:

- At exercise-time, calculate the gain here (between current date price and strike price).

- At sell-time, calculate the gain here (between exercise date price and current date price).

However, the first event, you don't owe any tax yet. You only pay the taxes for both exercise-time and sell-time taxes the year you sell the shares.

See the picture on [1] where "Prix d'exercise" = strike price; "Levée des options" = day you exercise the options.; "Vente des actions" = day you sell the stocks.

What is not 100% clear to me there is, what happens if the stock lost value between exercise date and sell date, can this loss offset the gains made on the first taxable event. In my opinion, to be 100% employee friendly, it should. But since the exercise date could have happened years ago, I'm not sure those can be offset since they aren't the same "type" of gains.

Anyways, with this system, in the case the company goes bankrupt and you never sold the stocks, at least you didn't pay taxes on money you never had in hands, you only loose the money you spent when exercising the options. I don't see how this can be abused.

[1] https://particuliers.societegenerale.fr/epargner/gestion_pat...

Re: Don’t Tax Options and RSUs Upon Vesting

#295

Post by conanbatt »

GeneralTspoon wrote: post #287
conanbatt wrote: post #280

Earlier quoted context omitted.

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 t…

I'm not so sure about the analogy, but I get your point. I think you're right that transparency is a big problem here. As long as others have perfect knowledge of the situation, they can factor the extra risk into their negotiations (e.g. Ask for more equity, because common shares are worth less if there are others with preferred shares). The terminology surrounding this is quite misleading too - as you mentioned in…

If it were of public knowledge that when a company IPO's, employees in total collect less than 10% of the gains, the public outrage would soon ban the practices that we see everyday.

Today we have a lottery where we dont know the winners and so they are protected. I dont have animosity against investors for protecting their gains, that is fine (for them, ofc, but they are reacting to their incentives).

The main reason cap tables are hidden is because the only person that can buy shares is an accredited investor, which means the company has to cater to them, not to capital.

If you as an employee were able to buy and sell the shares with liberty, companies would almost immediately make cap tables public to get cheaper funding from the general public. Suddenly, investors capacity to ask for things like privacy and preferred shares would dissipate: there are millions of employees in the bay area alone that would pour considerable money into it.

Increased capital means less concentrated gains, larger absolute gains, considerable increase in wages and overall greater investing efficiency.

Re: Don’t Tax Options and RSUs Upon Vesting

#296

Post by kelnos »

oneshot908 wrote: post #45
austenallred wrote: post #21

Earlier quoted context omitted.

That’s the point of options though - most of the time that “cash” doesn’t exist to be paid out in bonuses. Options are a bet that it will exist in the future. Why do startups pay lower salaries than Facebook? Because Facebook throws around $200-300k salaries and doesn’t care. Startups can’t do that, so it promises a piece of the pie if the company becomes big and successful instead.

At this point, unless you're C-suite, most startups are a really bad bet compared to the BigCos paying out anywhere from $250K-$1M annually depending on your skill set and experience. What's happening now IMO is that the hot talent has figured this out and they have accepted positions at Tesla, Salesforce, Google, Facebook, Apple, or Amazon. That said, I know someone who walked away from a $10M package over 4 years t…

I've heard Tesla and Apple actually generally don't pay that well (though my source is a few employees, so that may not be uniform across the company).

> ... but everyone has to follow their path, right?

That's the thing. I'm sure I could make more in salary from a larger company, but I'm addicted to autonomy, limited amounts of process, and having significant influence on what the company does and on its success.

Re: Don’t Tax Options and RSUs Upon Vesting

#297

Post by econner »

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…

The problem though is that if you have ISOs they usually have to be exercised within 90 days of departure from a company.

Some companies are extending that deadline to 7 years, but the IRS disqualifies ISOs 90 days after departure so they have to convert to NSOs.

So this would prevent companies from providing an option extension.

Re: Don’t Tax Options and RSUs Upon Vesting

#298

Post by hamburglar »

sulam wrote: post #284
hamburglar wrote: post #283

Earlier quoted context omitted.

Yes. I wonder how this would have turned out differently if I'd had ISOs. I exercised them all and paid taxes on the difference between the strike price and the 409(a) valuation, treated as income, and the company did me a favor by arranging for me to sell a small number of shares to one of their investors at much higher than the 409(a) valuation to cover my tax bill (the agreed-upon price was close to, but not quite…

Sounds like you got pretty much exactly what you would have in an IPO (presumably at a lower valuation of course) if you'd decided you were bullish on growth and didn't want to diversify. The main thing you missed out on was the ability to 83(b) exercise. If you don't know, that is something you can do in the first 90 days following the stock grant, where you write a check to the company (usually some administrator t…

No, it's still going and quite profitable. They never even took their next round, so dilution has been minimal. Edit: still private, though, so no liquidity on what I own. Patience.

Re: Don’t Tax Options and RSUs Upon Vesting

#299

Post by walshemj »

conanbatt wrote: post #212
walshemj wrote: post #154

Earlier quoted context omitted.

Why its to stop some shareholders being taken advantage of by companies with different share classes.

I think that effect is somewhat overrated. In the end, its best to let people get what they want. In that sense, not having information doesnt let people choose what they want. Limiting what can be offered is more likely to prevent people from being able to get what they want. Its possible that investors are very risk averse and so, are willing to pay a big premium for the preferred shares, one that employees are not…

Exactly and as a Union activist I shudder at some of the sharp practice and poor treatment of employees when it comes to share options by both employers and the govenment

Re: Don’t Tax Options and RSUs Upon Vesting

#300

Post by acjohnson55 »

Idea: the tax code should simply tax startup equity as normal income, at the time of sale, as much as possible. Tax the difference between value at grant time and value at the time of liquidity as ordinary income. Then tax the difference between that price and actual sale price as capital gains, to avoid penalizing employees from holding liquid stock.

Equity in a startup is effectively deferred cash compensation, in practice. It would be good to eliminate the complexities of option valuation, exercise concerns, and taxation issues from the list of worries of regular employees.

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