
Elizabeth Holmes Owes About $25M to Theranos - us0r
https://www.wsj.com/articles/theranos-founder-elizabeth-holmes-owes-about-25-million-to-blood-testing-startup-1491435009
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CalChris
From the company's POV, this is a _cashless exercise_. Theranos has loaned
$25M to Holmes who paid it to Theranos. This is a common structure. Dunno why
the WSJ didn't see that.

From her POV, she doesn't have _beneficial ownership_. I think that has tax
consequences.

[http://www.financeandflipflops.com/cash-vs-cashless-
exercise...](http://www.financeandflipflops.com/cash-vs-cashless-exercise-the-
stock-option-conundrum/)

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ChuckMcM
There is a lot of flexibility there. If they forgive the loan then she owes
tax on $25M (as if they had just outright paid her). I am impressed that the
board could use her shares as a way of getting the investors not to sue. Seems
like owning more of a nominally worthless asset isn't really better than just
getting some of your cash back.

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sjg007
They don't have to forgive the loan right? They just take the stock back? Then
she would owe nothing and have no tax due.

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brianfitz
That might seem like the common sense answer, but is the danger in exercising
options and holding them. In this case, the previous poster was correct --
once they forgive the loan, the $25 million becomes taxable income.

The reason it doesn't seem to make sense is that no actual value was gained in
the end. However, the IRS (and our tax laws) don't see it that way. Instead,
they back at the value that was gained at the time of the transaction. They
don't care what happens to the value in later years.

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sjg007
No I mean the stock is collateral regardless of its value. If it was worth
more than $25m she would sell it. But it's not so you just give it back.

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brianfitz
As stated before, it doesn't work that way. Google the horror stories on those
who have excercised options (and held the stock) on a liquidity event who had
to pay taxes on gains that existed at the time of the transaction, but later
dropped in value. Even though they never saw a gain other than on paper, they
get hit with a tax bill they can no longer afford. And the stock is unhelpful
because it's current market value is no longer reflective of what it was at
the time the IRS recognizes the gain. In your scenario, she could only cover
her tax bill with the stock if it were at a equal or higher value as when she
excercized them via the loan: [https://blog.wealthfront.com/exercise-stock-
options-taxes/](https://blog.wealthfront.com/exercise-stock-options-taxes/)

~~~
sjg007
That's not a risk if you early exercise at the time of grant where your strike
price is equal to 409A price. Then there is no taxable value.

~~~
brianfitz
We can agree to disagree. As a two time founder, I had to go through a lot of
discusssions with our legal and even my own to grasp the upsides and downsides
of what Elizabeth did by trading risk against a lower future tax liability. My
take is that you're confusing a normal cashless transaction versus a
structured loan as an executive of the company to purchase stock today to hold
for a long term horizon. The risks are very real and the liability is very
real. I meant this to be a way to share some specialized knowledge I have on
the subject to answer why she has an actual liability and why this isn't
handed out to just any employee. This isn't coming from book knowledge, but
real working knowledge of this arrangement. But at the end of the day,
everyone is free to do their own research. :-)

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URSpider94
I don't think this (loaning a founder or senior exec money to purchase shares)
is that uncommon a situation. When my previous start-up employer was
purchased, I read through most of the deal docs, hundreds of pages. One of the
things they mentioned is that the company floated several promissory notes to
the CEO to allow him to purchase more company stock. It was peculiar enough
that I made a note of it, but I never stopped to puzzle out why they did it
that way. Possibly to avoid a tax liability at the time of the deal? Or to
increase his compensation without actually increasing it on paper?

~~~
sjg007
Right but is it fair? Should employees not get the same deal?

~~~
URSpider94
Fairness, one way or the other, is hard to quantify here. CEO's get
compensated a lot more than other employees, in a lot of different ways; you
could just as easily argue that isn't fair either. Besides, at the bottom, the
CEO is taking on debt that could find him/her bankrupted if the company fails.
I don't think it would be responsible to even offer that facility to all
employees. It might not even be legal, if the employees are not accredited
investors, though I'm not sure about that.

I should add that I don't have any knowledge of who pushed for the deal, and
how it was set, but I doubt the CEO strolled in and just asked for the loan.
I'm assuming it was part of the compensation package that was proposed or
negotiated by the board and their comp consultants.

~~~
sjg007
The CEO won't go bankrupt.. these loans are backed by the stock as collateral.
But there should be a law that all such plans and purchase agreements are
available to all employees if available to the execs.

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mikekchar
> The CEO won't go bankrupt.. these loans are backed by the stock as
> collateral.

I couldn't actually find this out through a google search. What happens if the
market rate does not allow the lender to recover the principle? I thought
you'd still be liable for the remainder. It's just that they can force a sale
if they want to.

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allannienhuis
This isn't an ordinary debt from a 3rd party; it's a contract with the company
- they can put whatever terms and restrictions they like on that contract,
including no other recourse for the debt other than proceeds of the sale of
that stock, or it's forfeiture.

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scurvy
If the company forgives the debt, doesn't the IRS treat that as income?

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allannienhuis
Possibly, But there's a difference between a debt being written off
(uncollectable) and forgiven. There's also capital gains losses that might
offset potential income; the accounting for all of these cashless transactions
is complex - that's what the accountants and lawyers are for :P

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AlexCoventry
The proposed deal involves Holmes's shares in Theranos? What value do those
have now? I assumed the company is total loss at this point.

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bane
At the current valuation, I wonder if this is enough to put her into minority
shareholder status?

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pmiller2
Any paywall free source for this story?

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relyio
Anything for you [http://archive.is/qDQRB](http://archive.is/qDQRB)

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Overtonwindow
Possibly they're just trying to get the page views.

