
House Passes Employee Stock Options Bill Aimed at Startups - endswapper
https://morningconsult.com/alert/house-passes-employee-stock-options-bill-aimed-startups/
======
grellas
The original point of ISOs was to offer to employees the opportunity to take
an economic risk with stock options (by exercising and paying for the stock at
the bargain price) while avoiding the tax risk (by generally not recognizing
ordinary income from that exercise and being taxed only at the time the stock
was sold, and then only as a capital gains tax).

AMT has since emerged to devour the value of this benefit. By having to
include the value of the spread (difference between exercise price and fair
market value of the stock on date of exercise) as AMT income and pay tax on it
at 28%-type rates, an employee can incur great tax risk in exercising options
- especially for a venture that is in advanced rounds of funding but for which
there is still no public market for trading of the shares. Even secondary
markets for closely held stock are much restricted given the restrictions on
transfer routinely written into the stock option documentation these days.

So why not just pass a law saying that the value of the spread is exempt from
AMT? Of course, that would do exactly what is needed.

The problem is that AMT, which began in the late 60s as a "millionaire's tax",
has since grown to be an integral part of how the federal government finances
its affairs and is thus, in its perverse sort of way, a sacred cow untouchable
without seriously disturbing the current political balance that is extant
today.

And so this half-measure that helps a bit, not by eliminating the tax risk but
only by deferring it and also for only some but not all potentially affected
employees.

So, if you incur a several hundred thousand dollar tax hit because you choose
to exercise your options under this measure, and then your venture goes bust
for some reason, it appears you still will have to pay the tax down the road -
thus, tax disasters are still possible with this measure. Of course, in
optimum cases (and likely even in most cases), employees can benefit from this
measure because they don't have to pay tax up front but only after enough time
lapses by which they can realize the economic value of the stock.

This "tax breather" is a positive step and will make this helpful for a great
many people. Not a complete answer but perhaps the best the politicians can do
in today's political climate. It would be good if it passes.

Edit: text of the bill is here: [https://www.congress.gov/bill/114th-
congress/house-bill/5719...](https://www.congress.gov/bill/114th-
congress/house-bill/5719/text) (Note: it is a _deferral_ only - if the value
evaporates, you still owe the tax).

~~~
yaur
> This "tax breather" is a positive step

I'm really not sure that's true.

Its usually a bad idea to take stock options instead of a market rate salary
because most options are worthless in the long run. Lots of people do it
anyway because they have a fantasy about making it big. As it stands now this
is a life lesson that people spend some time in their 20s figuring out and
probably walk away with nothing but some valuable experience.

Under the current scheme exercising illiquid options is a bad idea most of the
time if you can't pay the taxes on it and this is obvious. This change doesn't
make it a better idea but it makes it much less obvious that its a bad idea.

That 20 something that would have walked away with nothing will be much more
likely to walk away with a 6 or 7 figure tax debt that may cripple him
financially for the rest of his life.

~~~
nostrademons
This is the current meme on Hacker News, but IMHO the pendulum has swung too
far.

You should absolutely be very careful about working for an early-stage startup
as an employee and taking options or equity in lieu of part of your salary.
You should feel that you trust the founders. You should insist that they've
figured out a.) who their customers are b.) why they want the product and c.)
how to make money, and have some concrete evidence that the customers do in
fact want the product. You should ask about the cap table, and liquidation
preferences, and anticipated future dilution, and know what percentage of the
company you'll own and how much you'll make under a variety of exit scenarios.

But if the numbers look good and you have solid evidence that people want the
company's product, oftentimes taking more equity is the right move. Equity
aligns your incentives with the company and ensures that if it does well, you
do well. Under capitalism, taking cash is a loser's bargain, not in the sense
that you always make less money (you often make more), but in the sense that
cash dominates equity _only_ if you've picked a losing organization. To the
extent that most organizations lose, this can be rational, but to the extent
that you're an independent economic actor trying to maximize your returns,
it's often worth putting in the research to try and maximize your chance of
picking a winner, particularly given the other career benefits of having a hot
startup on your resume.

~~~
btilly
I disagree.

The optimal long term strategy for managing a portfolio of independent
investments is to always pick a mix that maximizes the expected value of the
log of your net worth. This leads to a more conservative investment strategy
than the naive "maximize your expected value", and explains such things as why
money-losing investments into buying insurance can be a really good idea.

In general this is probably not a bad life strategy.

Let's use the back of the envelope that of VC backed companies, 10% are great
successes, 60% die, and 30% will last a good amount of time but don't recoup
the investment. The average employee in a successful startup will get a nice
payday, but not exactly a life changing amount.

This is doubly true for people capable of being software developers. Your
expected income from work is already sufficiently high that a million dollar
payday does not change the log of your net worth by that much. Having worked
in a hot startup is good for your salary, but usually not by a factor of 2 let
alone enough to really change the log of your net worth.

The end result is that it is economically irrational to give up, say, 5% of
your salary in return for a chance at hundreds of thousands if the startup
sells for hundred's of millions.

Now there are lots and lots of reasons to be an employee at a startup. If you
do, there are lots and lots of reasons to pick one that you think has a good
shot. But the hope of becoming rich off of options is only one of them if you
derive great entertainment value from it.

~~~
nostrademons
Why log?

I get that your utility function from money is non-linear, but I would expect
a more accurate model to be a step-function, with large steps at "out of
debt", "can tell a bad boss sayonara", "can buy a house", "can pay for kids'
college eduaction", and "never have to work again". Equity payouts from a
typical startup exit often line up nicely with the middle three, and if you
hit the Google/Facebook jackpot, sometimes the last.

~~~
sedachv
> I get that your utility function from money is non-linear, but I would
> expect a more accurate model to be a step-function

I think you just answered your own questions - log is continuous.

~~~
nostrademons
Your utility function doesn't have to be continuous for you to maximize it,
though.

------
matt_wulfeck
> Only startups offering stock options to at least 80 percent of their
> workforce would be eligible for tax deferrals, and a company’s highest-paid
> executives would not be able to defer taxes on their stock under the
> legislation.

I understand the desire to avoid a regressive taxation system, but why is it
that every tax rule we create comes with 2x the amount of caveats and rules?
Our tax system is becoming a mess.

At this rate soon _nobody_ will be able to file their own taxes without an
accountant to sort through the muck. And complicated to systems tend to
benefit the wealthy.

~~~
shados
the US is in a weird position where the federal government actually has very
little power. But it has tax power. So they just use taxes as a way to
manipulate things in the way they want.

But as far as I understand, the US tax system is also one of the 2-3 most
complicated in the world... Being an permanent resident and not being used to
this from my home country, Im making a lot of suboptimal financial decisions
purely to avoid complicating my taxes... eg: I avoid consulting like plague,
even when I have a worthwhile opportunity to do so.

~~~
LastZactionHero
You could find an accountant to do your taxes. It would probably cost much
less than you'd make consulting, and sometimes they can find ways to save you
more money than you paid.

~~~
nojvek
That's right. I always use an accountant who is a family friend. She charges
about $200-$300 but manages to usually get back multiple magnitudes of that
back. Plus she's always there to answer any questions about what options I
have and what should be my best strategy.

------
djrogers
This is good news, but it may not go anywhere -

 _" the Administration strongly opposes H.R. 5719 because it would increase
the Federal deficit by $1 billion over the next ten years." [1]_

So a really bad tax rule is in place, but since it happens to bring in
~$100M/yr, we shouldn't fix the rule?

[1][https://www.whitehouse.gov/sites/default/files/omb/legislati...](https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr5719r_20160920.pdf)

~~~
dragonwriter
> So a really bad tax rule is in place, but since it happens to bring in
> ~$100M/yr, we shouldn't fix the rule?

Assuming, for the sake of argument, agreement that the rule is bad, fixing it
without paying the cost at the same time may still be worse.

~~~
st3v3r
While true, on the scale of the federal government, $1 billion is pretty
trivial.

~~~
dragonwriter
If you make a policy of ignoring individual things because the cost in
isolation is trivial, the sum of those ends up not being trivial. Or, as is
popularly misattributed to (but endorsed by) Senator Everett Dirksen: "A
billion here, a billion there, and soon you are talking about real money".

------
calcsam
This is amazing news. Some context:

It's quite common to owe taxes today for gains on the value of your stock --
which is an illiquid asset you can't sell. This puts employees in the position
of shelling out cash to keep something that rightfully belongs to them, or
simply abandoning it (failing to exercise) when they leave the company. This
bill would defer taxes on gains up to 7 years, or until the company goes
public.

If you are awarded stock options, an you exercise them, you have to file an
83(b) election within 90 days or else you are liable on all paper gains in the
value of your stock.

Even if you file an 83b election, you are still liable for paper gains between
the value of your options when you were granted them and the value when you
exercised.

For example, if you were awarded options with a strike price of $5 and the
company raised a new round of funding and the 409A valuation (& strike price
of the new options) has risen to $15 per share, the IRS considers that you now
owe taxes on $10 of income / share. In other words, it costs you not $5 /
share to exercise but ~$8.50 including taxes.

So the tricky part about options is that they require money to exercise, money
that you often don't have ready, in order to obtain an asset that is (a) not
liquid and (b) may decline in value (c) you often can't sell due to transfer
restrictions.

For example: one early engineer at Zenefits had to pay $100,000 in taxes for
exercising his stock....and then all the crap hit the fan, and he likely paid
more in taxes than his shares will end up being worth. Ouch.

As a result of this problem with options, many startups -- especially later-
stage ones like Uber -- choose instead to offer RSUs, which are basically
stock grants as opposed to stock options. You don't have to pay any money to
"get" them like you do for options.

However, the IRS considers stock grants, unlike options, _immediately taxable
income_. If you get 10,000 RSUs per year, and the stock is valued at $5/share
by an auditor, you now have to pay taxes on $50,000 of additional income, for
an asset that you likely have no way of selling.

Some startups allow "net" grants -- which basically means they keep ~35% of
your stock in lieu of taxes. That solves the liquidity problem, but offering
this is completely at the discretion of the startup and some don't, which
leaves employees at the mercy of the IRS, again having to pay cash on paper
gains of an illiquid asset.

~~~
Eridrus
> For example: one early engineer at Zenefits had to pay $100,000 in taxes for
> exercising his stock....and then all the crap hit the fan, and he likely
> paid more in taxes than his shares will end up being worth. Ouch.

Would this bill actually help this scenario? I'm unclear if deferring the tax
liability just means that you pay the same amount of tax later, or if you can
write off capital losses like this at the time your liability is due.

~~~
aqme28
This bill reduces the main reason that employees exercise their options
"early" while they're still illiquid. The employee likely wouldn't have paid
that money until there was an actual liquidity event.

~~~
harryh
This is not correct. The main reason that employees exercise options "early"
is if they change jobs and have to exercise to keep their options.

~~~
a13n
Or because exercising early means you pay some long term capital gains instead
of income tax.

~~~
harryh
Ya, totally true too.

------
asah
Can someone explain: if you exercise and hold the shares (eg leave the
company) do you owe tax after year seven, even if the shares remain illiquid?

That's the core issue: the IRS is taxing individuals on truly illiquid assets.

~~~
jimbokun
True, but is it the IRS' fault if the corporation refuses to create a market
for their shares? If the IRS didn't tax these shares, it would quickly become
a tax shelter of epic proportions, no?

~~~
beagle3
No. But it isn't the individual's fault either. And it IS the IRS' fault for
taxing an illiquid asset as if it were liquid.

The only way that this sort of makes sense is if you can pay your tax in
illiquid assets - e.g. If you can pay your tax with the same shares.

The most logical tax code I know can be summarized as: no basis step-up except
on an event when taxes are paid; taxes are paid whenever (and only if)
something liquid gets exchanged. Even an exchange of illiquid with illiquid
doesn't trigger step up or tax event.

As long as it is illiquid, taxing gains seems about as logical is randomly
announcing "everyone should mark their assets now and pay taxes on unrealized
gains" (which the IRS actually does if your financial asset is outside the US,
but it is still crazy)

~~~
overdrivetg
I can't upvote this enough. If the IRS is ascribing value X to stock options I
can't liquidate, I should be able to pay my tax in the form of those options
at whatever value I am being taxed on them.

Of course, the devil's in the details as you probably don't want the
government having voting shares in a bunch of private companies either...
Maybe they just get a blanket clause to automatically exercise and sell as
part of any IPO offering or something?

This could have a double-down effect too as the government owns more illiquid
stock and feels firsthand the pain of regulations (SarbOx anyone??) that
result in fewer IPOs / longer time horizons to liquidity.

Oh your revenue is going down because you've regulated companies out of the
IPO market? Great, looks like time to get off your ass and actually FIX THE
PROBLEM. C'mon guys.

------
jnordwick
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.

~~~
stustein
If the income is deferred, I would imagine that it wouldn't apply to AMT
calculations. It'd be nice for that language to be explicit though.

Regardless, the Obama Administration "strongly opposes" the bill in its
current form since it would "increase the Federal deficit by $1 billion over
the next 10 years."

[https://www.whitehouse.gov/sites/default/files/omb/legislati...](https://www.whitehouse.gov/sites/default/files/omb/legislative/sap/114/saphr5719r_20160920.pdf)

I wonder how often bills with this "strong opposition" still end up getting
passed anyway.

~~~
dwaltrip
The federal budget was $3.8 trillion (with a "t") last year, and the deficit
was $438 billion. Increasing the annual deficit by $100 million[1], or 0.02%,
seems like a non-issue.

[1] $1 billion over 10 years is $100 million per year.

~~~
stustein
Agreed — it's a pretty weak reason to "strongly oppose" a bill, which is why
I'm wondering how likely it would be for the Administration to change their
position. Like, what percentage of the time do they issue a statement in
strong opposition but then end up passing the bill anyway?

------
martin_
This sounds great, though requiring "offering 80% of the workforce stock" and
excluding highest paid executives seems vague - is this at time of hiring,
when stock is issued, fully vested, when taxes are due, somewhere inbetween? I
parted ways with a startup in the valley last year and exercised some shares
on January 13th. If I had exercised just two weeks earlier, I'm told I
would've been hit with north of 50k in AMT, I have until next year to figure
it out now but I wonder if I'm eligible. Also curious how long it typically
takes to get from house, through the senate and passed.

~~~
tetrep
From the bill, a corporation qualifies (aka the current state of affairs)
if...

such corporation has a written plan under which, in such calendar year, not
less than 80 percent of all employees who provide services to such corporation
in the United States (or any possession of the United States) are granted
stock options, or restricted stock units, with the same rights and privileges
to receive qualified stock.

~~~
martin_
So there's no way it could be retroactively applied, then. Bummer!

------
gtrubetskoy
I still don't understand why taxes are owed. If an option at the time of grant
is worth $0 (which is how it's typically done or is that not the case?), then
you don't owe anything to the IRS until you exercise the option, i.e. buy
shares at the option price and sell them at presumably higher valuation and
make some money, at which point you will need to part with some of it because
it's income.

But if you never exercise the options, then you never owe any tax. What am I
missing here?

~~~
toomuchtodo
If you exercise your ISO options (because of option expiration clauses,
typically 90 days after you leave a company), but then don't (or can't due to
no market for the shares) immediately sell those shares, the spread between
the option grant price and the current 409A valuation is due as AMT tax. You
have not realized an event where cash is in your pocket, but you still owe tax
on the "gain".

You ask what does it matter if the options aren't exercised. Excellent
question! It means all that potential compensation you were offered (because
you took a lower salary usually in return for options) is now worthless.
People don't want to work for free, or have their potential future
compensation evaporate.

~~~
dlubarov
> the spread between the option grant price and the current 409A valuation is
> due as AMT tax

For ISOs. When you exercise NSOs, the spread is taxed as ordinary income.

~~~
toomuchtodo
Thanks! Clarified my post.

------
revo13
More evidence as to why the income tax should be replaced with a consumption
tax. Just let people make their dammed money already and apply a simple tax
when they spend it. Windfalls wouldn't be "dangerous" or punitive in that
model, and savers would be rewarded.

\--Of course I oversimplify the consumption tax, and safeguard would need to
be in place on that to ensure it is not regressive with respect to
necessities...

~~~
whamlastxmas
High consumption tax creates an incentive to not spend your money, which is
bad.This also means the millionaires and billionaires of the world get to
invest their money tax-free to earn even more money, often with rent-seeking,
while 95% of America is getting taxed essentially up front on the vas majority
of their earnings because it gets spent on stuff like housing, food, and
healthcare.

This creates a massively regressive tax system, which is a super shitty thing
unless you're a libertarian who can't understand the concept of marginal
utility.

~~~
revo13
So you are content with having a tax system that treats you like a 1%er in the
event that you cash in a payday (say $1mil - 35-40%) during a given year,
despite the fact that you may have worked your whole life at a middle class
level, scraping to save? A consumption tax would allow individuals to actually
make choices about how/when they are taxed. Lets be honest, people will still
want their "stuff". If they have more money in their pocket, they will spend.
That is what America is built on. I would like the opportunity to defer
spending at my choice in order to save more in the present without being taxed
into oblivion.

And I'm sorry if you didn't read my entire comment. Of course an ignorant
consumption tax is regressive. SAFEGUARDS would have to be in place to ensure
that the population can acquire necessities without an undue burden being
placed on them. Exactly the things you mention: housing (single home), food,
healthcare. However, 50"\+ 4K TVs do not fall in that category. 30' fishing
boats do not fall in that category. Certain items in sales tax heavy states
(Texas) already do this is the form of tax free checkout for certain item
classes (food at grocery stores).

~~~
whamlastxmas
If I normally make 60k a year and get a one-time payday of $1MM, I'll be
paying around 13% more in income tax on that million dollars than I do on my
regular income. Even with AMT it isn't a huge deal. This seems pretty
reasonable to me. It's not perfect but it's not a reason for completely
eliminating income tax. It's a reason for having exemptions, which is exactly
what this article is about.

>If they have more money in their pocket, they will spend. That is what
America is built on.

This is simply not true for people with millions of dollars. Look at the
percentage of income spent for someone making $500k a year, and the percentage
spent by Bill Gates or any other billionaire. It's a huge difference, and
there's a huge difference between both of those groups and someone making
$100k a year who is usually spending almost all of their income. Consumption
tax is also completely ignoring the "spend it overseas" and million other
loopholes.

I am not convinced any method of consumption tax I've read about, regardless
of safeguards, would retain the same level of tax income the government
receives while also not increasing the burden on lower and middle income
households. The vast majority of tax revenue comes from an extremely small
percentage of earners, and you'd be losing the vast majority of that income if
you only taxed their spending.

The only way I can see this working is if you almost exclusively taxed things
rich people bought. Increase sales tax on homes over $1 million, cars and
boats over $200k, private jets, etc. But the tax rate on these would have to
be ridiculously high, more than doubling their costs. All the rich people
would just buy them overseas.

~~~
revo13
$60,000 income with std deduction and personal deduction equates to a tax
burden of $8,219 or effectively 13.7%. $1,060,000 income equates to a tax
burden of $406,314 or effectively 38.3% (treated as a short term capital
gain).

That is money I could have saved and invested BEFORE being taxed an
extraordinary rate for it relative to my place in life. I happened into money
when I'm typically taxed at <14%, and nearly 40% of it is taken from me.
Simply because I earned it over the span of 12 months. What if I built a
company over 10 yrs and that is the culmination of that?

>> All the rich people would just buy them overseas.

That is a fair point. That said, if I buy something overseas from Europe right
now, I don't pay VAT (coming from US). A large number of vendors compensate
for this and keep the prices for US purchasers high and not an exact match to
their Euro prices. So I think in practice you would see overseas retailers
raising their prices to come close (or match) the US price that includes the
consumption tax. That would balance out and lead people to do the easy thing
and just buy in the US. Maybe... Maybe not...

------
zkhalique
Meanwhile, the USA actively encourages companies to offshore their money with
their tax code:

[https://en.wikipedia.org/wiki/Companies_of_the_United_States...](https://en.wikipedia.org/wiki/Companies_of_the_United_States_with_untaxed_profits)

------
adanto6840
The bill text is here and is pretty easy to decipher:
[https://www.congress.gov/bill/114th-congress/house-
bill/5719](https://www.congress.gov/bill/114th-congress/house-bill/5719)

~~~
harryh
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 story
though.

~~~
rplst8
> For that matter we should get rid of the AMT entirely. The fact that we have
> 2 separate tax systems for individuals is insane.

It really is. The AMT is the perfect example of when you give someone an inch
they take a mile, which is why some people fight so hard against the enactment
of new taxes.

The AMT was originally enacted to catch a handful (less than 200 I believe)
people who were at the time of enactment (1969) very rich and who were paying
no taxes. These people had an AGI of over $200,000. That's $1.2 million in
today's dollars. The AMT now affects over three million tax payers, mostly
because for many years, the exemption was not properly indexed to inflation.

~~~
MichaelBurge
> The AMT is the perfect example of when you give someone an inch they take a
> mile, which is why some people fight so hard against the enactment of new
> taxes.

When the politicians were first proposing the constitutional amendment that
allowed income taxes, they were throwing numbers like 1% or 2% around. It took
only 4 years from the ratification of the 16th amendment for the maximum tax
rate to shoot up from 7% to 67%. Now you get an effective 50% tax rate in some
states. No wonder office workers spend so much time unproductively checking
email and Facebook - that's the half of their time they're giving to the
government.

Here's a history of the federal tax rate. Notice how it shoots up around World
War 2, and takes a very long time to change even after the war ends. So it
can't be that the taxes are high simply to fund government services that
naturally arose:

[https://www.scribd.com/doc/190499803/Fed-U-S-Federal-
Individ...](https://www.scribd.com/doc/190499803/Fed-U-S-Federal-Individual-
Income-Tax-Rates-History-1862-2013#fullscreen&from_embed)

They should just repeal the 16th amendment.

~~~
brianwawok
So you cap income tax at 2%. Congratulations you just tripled property tax and
made sales tax 20%.

Taxes are like wackamole. You can't just limit 1 tiny piece and expect
anything to change.

Furthermore you can't just lower the total take unless you want to explain
where the cut is coming from.

Less school funding? Less roads? Less police? Less Army? More debt?

~~~
MichaelBurge
My understanding is that the federal government cannot impose a property tax,
without just distributing it to the states by population. My reading of the
commerce clause is that they couldn't impose a sales tax on in-state commerce.
So it's not like these went away after they gained the power to assess an
income tax: they were never an option.

As a general rule, you could remove any government agency created with the
increase in wartime tax revenue after the war is over. That should get you
back to the pre-war tax rate.

I don't want to go down the entire list[1] of agencies, since it would take
the thread too far off-topic(even this response is borderline). I should shift
more work to the individual states. Also cut the military: They are so
disorganized they're the only government branch that can't be audited[2].

[1]
[https://en.wikipedia.org/wiki/List_of_federal_agencies_in_th...](https://en.wikipedia.org/wiki/List_of_federal_agencies_in_the_United_States)

[2] [http://www.reuters.com/article/us-usa-audit-army-
idUSKCN10U1...](http://www.reuters.com/article/us-usa-audit-army-
idUSKCN10U1IG)

~~~
dragonwriter
> My reading of the commerce clause is that they couldn't impose a sales tax
> on in-state commerce.

(1) The commerce clause is a _grant_ of power, not a limit. It's indisputable
that the commerce clause does not _authorize_ a tax on in-state commerce, but
it doesn't prohibit one, either. So we need to look beyond the commerce clause
and ask if a federal sales tax is authorized anywhere else.

(2) The dollar value of sales is income, derived from sales. The 16th
Amendment gives Congress the authority to "lay and collect taxes on income,
from whatever source derived, without apportionment among the several states".
Therefore, a federal tax on the gross income from sales is authorized by the
16th Amendment.

(3) But, wait, we don't even need the 16th Amendment. There's a special word
for a tax on sales of goods -- its called an "excise". And its an _express
Constitutional power of Congress_ even before any amendments, in the Tax and
Spending Clause, with the restriction that they must be uniform throughout the
United States.

------
ap22213
What the house needs to do is regulate startup's shady options agreements. I
see way too many developers getting burned out striving for that big payout
that may never come. It's the classic con game.

------
mrfusion
Does anyone have experience buying stock options from employees. I really want
to own shares in a few companies that would never hire me :-(

~~~
chubot
I would check out sharespost, equityzen, or equidate (and also search for them
on Hacker News, as I found others mention experience with sharespost). I don't
have direct experience, but I was helping a friend with a number of shares in
a late stage startup research the sell side, and those are the companies that
came up.

It crossed my mind to buy shares but I haven't done so. For some of them, you
have to be an accredited investor, which means a certain net worth/income
threshold to be met. (I think the SEC is trying to prevent naive investors
from getting fleeced in this "dark" market). SharesPost seems to have a fund
that gets you exposure to a lot of late stage startups.

AngelList apparently has a fund for early stage startups... if anyone knows
anything about that I would appreciate any feedback.

EDIT with more info: From my research, buying from every company is different.
That is why companies like SharesPost exist. And you really should have the
permission of the company to do the transaction.

I think it may be possible to do it without their permission, but that's
beyond my knowledge. There should be employees willing to go through this
effort because they stand to benefit because you are offsetting their tax
risk.

~~~
mrfusion
Thanks for the helpful answer. Do you need a lawyer or accountant when using
one of those sites or is it all pretty standardized?

~~~
chubot
I don't know since I haven't used them yet. I imagine the middleman is fairly
well aligned with you because their business model is to take a cut of the
transaction. If they're getting 5% of a $100K or $500K transaction, that's a
fairly good incentive not to try to screw people over. Disputes cost time and
money.

The party that isn't aligned is the employer. As mentioned, they hold right of
first refusal, and they may balk at having "strangers" on the cap table.

I'm sure there is a whole bunch of "interesting" paperwork and if you had a
lawyer look at it they would gladly take your money. I believe each company is
different, because the way you hold private shares depends on the company
governance. SharesPost has presumably done some of the legwork for you because
they are advertising this facilitation only for specific companies, which they
have hopefully vetted in some way.

I imagine that SharesPost exists precisely because people had to get lawyers
and accountants involved to do these custom transactions, and now they are
pushing it to the lower end of the market. But they are also fairly new so
they can't be perfect.

------
jkern
How does this relate to the push for startups to change from a 90 day to 10
year exercise window? It seems like that's a better option than this bill
since it gives employees a larger time window to make an exercise decision,
during which the likelyhood of options actual resulting in something liquid is
much higher

------
nullc
Perhaps I'm misreading the law, but it looks like it solves the wrong problem:
It addresses a cash-flow issue rather than the tax liability issue.

Say you have options at FooCorp and you leave. FooCorp is illquid and you have
90 days to exercise your 10,000 options. Your FC options have a $5 strike, but
the company currently has a 409a valuation of $100/share.

To exercise the options you would need to pay $50,000 to FooCorp, then you
would have a "realized gain" 950k (($100-$5)*10000 which you would owe 28% of
in taxes that year, or 266k. So you would need access to $316k in total in
order to exercise these options.

Two issues arise: (1) You may not have $316k just kicking around. (2) THE
SHARES ARE ILLIQUID AND MAY BE WORTH $0 WHEN YOU CAN ACTUALLY DO ANYTHING WITH
THEM.

The bill appears to help with (1) by letting you pay that 266k not now-- but
later when the company shares become liquid or 7 years (whichever comes
first). But it does nothing about (2) -- you might exercise and then the
company goes bust, and seven years later you owe $266k and your current
position is worth -50k... and because the taxes are AMT, you can't
meaningfully write them off your losses against the taxes you owe.

This kind of failure doesn't require FooCorp to fail. You could have options
at $5, execute at $100, and have things go liquid at $7-- ignoring taxes this
would have been a $20k gain. But with the taxes you're still $246k in the
hole.

The issue all along wasn't that someone needed extra money. The issue was the
potential huge losses. If it weren't risky you could find a lender to cover
the execution price and taxes in exchange for a return when the asset becomes
liquid. (E.g. having to pay the $266k up front but getting it returned later
when the asset becomes worthless and you write it off)

If anything this makes the situation worse by encouraging more people to
commit financial suicide by making it less obviously a bad idea while being
just as risky as it always was.

------
koolba
> Only startups offering stock options to at least 80 percent of their
> workforce would be eligible for tax deferrals, and _a company’s highest-paid
> executives_ would not be able to defer taxes on their stock under the
> legislation.

Is this why I keep seeing nominal $1 salaries?

~~~
aetherson
No.

~~~
ccostes
Based on this short Wikipedia page [1] it sounds like it's done to avoid
payroll taxes like social security and medicare.

Any other reason to do this?

[1] [https://en.wikipedia.org/wiki/One-
dollar_salary](https://en.wikipedia.org/wiki/One-dollar_salary)

------
AdamN
I wish this was retroactive :-(

------
cdbattags
How would this affect the concept of phantom stock options? I worked at a
startup who used the main excuse of no taxes paid handing out ghost options
instead of normal options.

"Phantom stock can, but usually does not, pay dividends. When the grant is
initially made or the phantom shares vest, there is no tax impact. When the
payout is made, however, it is taxed as ordinary income to the grantee and is
deductible to the employer."

[https://en.wikipedia.org/wiki/Phantom_stock](https://en.wikipedia.org/wiki/Phantom_stock)

------
k2xl
I'm confused. I bought shares this year and would be hit with 50K tax bill
from AMT next year.

Does this mean I don't owe AMT addition next year?

~~~
harryh
You'll (very probably) still owe AMT taxes.

Just because the house passes a bill doesn't mean it's a law. It also has to
pass the Senate and be signed by the President (or go through the veto
process).

~~~
k2xl
If this bill did pass, would I not owe taxes?

~~~
harryh
Unclear. Probably you still would. Generally new laws only affect future years
though it can depend.

------
stevenae
The article appears to get the "seven years" qualification wrong. The bill
states that tax must be paid at:

>> the date that is 7 years after the first date the rights of the employee in
such stock are transferable or are not subject to a substantial risk of
forfeiture, whichever occurs earlier

Which implies that transfer-restricted stock grants do not start this clock
ticking.

------
tmaly
I am wondering if there will be additional complexity added to the rule making
phase of this if it becomes law.

While this amendment is short in length, it seems to add additional complexity
to an already complex tax code. I would have liked to have seen an even
simpler proposal.

------
throwaway6497
Dumb question: Does it mean, it is law now.

~~~
etjossem
Nope, it still needs to get through the Senate and be signed into law by the
President.

[https://www.congress.gov/bill/114th-congress/house-
bill/5719...](https://www.congress.gov/bill/114th-congress/house-
bill/5719/actions)

------
ulkram
When does this go into effect?

~~~
etjossem
Only once the Senate votes for this bill (and the President signs it) will the
IRS be obliged to implement it.

[https://www.congress.gov/bill/114th-congress/house-
bill/5719...](https://www.congress.gov/bill/114th-congress/house-
bill/5719/actions)

------
ulkram
when does this go into effect?

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

~~~
gshulegaard
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...

~~~
harryh
You have the gist right but a couple of corrections:

1) The board doesn't set the price arbitrarily. They engage a 3rd party
accounting firm to do a 409A evaluation of the company. The 3rd party
essentially sets the price. It's true that determining a market price for
private company stock is just as much art as science but it's not completely
arbitrary.

2) The company ABSOLUTELY CANNOT offer stock options at a discount to the
409A. There is a good chance people would go to jail these days if they did
that.

3) The discount that you are talking about is the discount from preferred
stock (which investors generally hold) and common stock (which employees
generally hold). Preferred stock is legitimately more valuable because of
various privileges attached to it that are not attached to common.

4) If you immediately exercise your stock upon granting you won't face an
"exercise tax" interaction because the price at which you exercise will be the
same as your strike price. If you can afford it this, is often a good idea.
You have to file some paperwork with the IRS called an 83B to do this right.

5) It's when you wait some period of time that you can face an exercise tax.
This is because over time the company will do additional 409As and if the
company is succeeding those will indicate that common stock has risen in
value. It's that difference that you might have to pay taxes on. It's this tax
that this bill aims to let you defer.

~~~
rlucas
> 2) The company ABSOLUTELY CANNOT offer stock options at a discount to the
> 409A. There is a good chance people would go to jail these days if they did
> that.

Absolutely false. A company can create an option, a warrant, etc. with
whatever kind of terms it likes, so long as the board approves and it's
permitted by the applicable state law and charter.

The only thing a 409(a) valuation does is provide a "safe harbor" for the
company and the employee, that allows them both to rely on the valuation as
fair market value for tax & accounting purposes (for the company, so that it
doesn't need to expense the option; for the employee, so that there's not an
immediate taxable gain upon vesting).

The board, in fact, can make its own determination of fair market value
without a 409(a) valuation. But if they do that, they blow their safe harbor
and the burden of proof is on them if the IRS comes knocking. So no competent
counsel is going to let you go around making up your own FMV.

Finally, I'm pretty sure that a board could even issue options that didn't
even pretend to be at FMV, but were at some unconstrained number. There's very
good reason, for example, to issue out-of-the-money options when you want
people to have skin in the game. There's probably some conceivable reason to
issue an in-the-money option, too. (If you do this, though, you are likely
condemning both your company and your optionee to a pretty dark slog through
the thickets of tax law.)

It is true that there were some criminal (and civil) sanctions tossed around
for options shenanigans in the dot com 1.0 days, but they were mainly due to
_public_ companies blatantly back-dating options to specific days when the
stock price was down, so as to provide guaranteed value to options recipients,
without the company needing properly to account for the expense.

~~~
harryh
OK ya, that's all fair. I overstated. I will amend my comment to say that if
companies do offer options at a discount to the 409A everyone involved needs
to be very very very careful about tax laws or bad things can happen to both
the company and the option grantee.

