
Gilt Groupe Is a Cautionary Tale for Startup Employees Banking on Stock Options - coloneltcb
http://recode.net/2016/01/19/gilt-groupe-is-a-cautionary-tale-for-startup-employees-banking-on-stock-options/
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zekevermillion
The real problem is 409A -- the provision should only apply to options in
publicly traded stock and other similarly liquid comp. In the long-ago times,
companies apparently could hand out options with nominal strike prices without
any bad tax consequences. Now we have to set the strike price at least equal
to "fair market value" on the grant date, even if there's no market for the
stock. This imposes a transaction cost toll on early-stage companies, while
simultaneously penalizing startup founders and employees.

~~~
Animats
That was imposed because companies would reprice stock options for their
executives when the stock dropped. Shareholders hate that; they don't get a
bailout like that.

The pre-IPO valuation thing is a mess. It's probably going away; investors are
tired of being clobbered when the price goes down on a company that's
supposedly successful.

~~~
zekevermillion
Makes sense for a public company, but why impose 409A on startups? While we're
at it, why do we tax startup founders on restricted stock grants -- should
just tax when they sell the stock, or maybe when it is listed on a public
market...? These changes ("reforms" in my view) may never happen, or may take
a loooong time though.

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exolymph
IMO it's best to regard stock options as worthless, even though that's not
technically true.

~~~
chasing
Well, they're financial instruments. And like any financial instruments, they
need to be understood. I'm not sure most people understand how stock options
work.

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w1ntermute
Exactly, it's silly to say they're worth _nothing_. That's like staying stocks
you buy are worth nothing because the value _could_ drop to 0. It's a matter
of understanding what the probable outcomes are.

~~~
exolymph
Agreed. However, the human mind doesn't cope well with probabilities, so I
think letting yourself believe that stock options are worth nothing is a good
intellectual shortcut.

~~~
khuey
The real disaster scenarios come not from when they're worth nothing, but when
they're worth less than nothing.

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andriesm
If you buy listed shares on the nasdaq, and they fall you lose money. duh?

No reason to think it works any differently in a private company - in fact
private shares often carry a much higher risk of becoming worthless.

There is no certain guarantee that shares in your current or past employer "is
gonna pay for your house".

If you have such an attitude you really should be thinking twice.

This whole "share options for everyone" mentality is a problem.

Share options are for risk/reward seekers - which means you accept the RISK
just as eagerly as the reward.

Options are not supposed to be some sort of freebie lottery ticket for
everyone.

Its meant as incentive for people with an entrepreneurial spirit who may be
taking risks in terms of job security, or those who bring highly specialized
knowledge to a startup at below market salary, or as an incentive for
employees to work far harder than they would normally be expected to be
working.

Tax considerations - definitely get real expert advice

And see what others have said below.

~~~
kortox
You don't owe taxes at the time you buy publicly traded stocks and if you were
exercising options on a publicly traded stock you could sell some percent to
cover your taxes, that's different than owning a completely illiquid asset yet
still having taxes on it.

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ChuckMcM
If you are new to stock options, it would be good for you to pay attention
here. I am not qualified to offer tax advice, so this is all fiction based on
my experiences of paying taxes in the Bay Area while working at startups and
larger companies ...

It used to be that you could buy your options and hold them without any tax
hit. After holding them for a year, _if you could sell them_ , any gain was
taxed at the long term capital gain rate. Since the long term capital gains
rate (LTCGR) was much much lower than the short term gain, this strategy
reduced the amount of taxes you paid. It was deemed a "loop hole" that the
rich used and it needed fixing.

The fix was something called "Alternative Minimum Tax" or AMT. The way AMT
works is it ignores the fact that you cannot sell your stock, and asks you to
compute if you had sold the stock options you just exercised and treated all
of that gain as ordinary income, how much tax would you have owed in that
fictional scenario? Then it asks you to compare your tax bill in that
fictional universe, and your bill without considering that fiction, and which
ever is higher? That is how much you owe in taxes. It doesn't matter how you
came by the stock, it could be through restricted stock plans (no cost to you
to vest) or incentive plans. The difference between how much you paid, versus
how much that stock is theoretically "worth" is treated like ordinary income.

What that means from a practical standpoint is that you are screwed either
way. But if the stock becomes worthless you are doubly screwed. First you lose
all the money you paid to exercise (the value is now zero) and second, while
you can claim a capital loss, that loss can only be applied against an
offsetting gain of "like" kind. So back when it was an AMT calculation you had
to treat it like ordinary income, but now as a capital loss you can only
offset other capital gains. The small concession is that you can consider up
to $3,000 as a loss against your income (so you adjust your income down by
$3,000 and you end up not having to pay the marginal rate income tax on that
$3,000. If you're in California and an engineer making $100K+ annually that
means you are probably in the 28% tax bracket paying 28% federal and 11% CA
state tax, (39%) so you get to "keep" 39% of $3,000 or $1,170 that you would
have paid in taxes.

So are you keeping score? You paid $3,000 in tax on an asset you could never
sell, and you got to offset your income by $3,000 so you got "back" $1,170 of
it, letting $1,830 of it evaporate into smoke.

You can get it back, dollar for dollar, if you have some capital asset that
you're selling and seeing a gain on, then you can apply every dollar of your
loss against that gain, up to all of your loss, and not pay any tax on that
gain. (that doesn't work for offsetting AMT but does work for an actual
capital gain, like sale of property or equity you were already holding).

The system is designed to take money you might have otherwise been entitled to
out of your pocket and to put it into the general fund of the government so
they can spend it poorly on their own programs (ok that is a bit cynical but
seriously, I would be totally ok if they told me I had to give some to
charity.)

If you don't have capital gains you want to offset, don't exercise your
options until you can actually sell them. If they are going to expire before
you can sell them, the safe play is to let them expire.

~~~
x0x0
Don't exercise until you can sell is great advice, but the giant wrinkle
(particularly now that startups take far longer to go public) is if you don't
wish to work for a company for 10+ years, you have a short exercise window
after leaving a company. Some (very few) are converting ISOs to NSOs if you
leave, allowing former employees to wait until the security is liquid before
buying it.

My suggestion to all engineers is to use the leverage you have and insist that
vested ISOs convert to NSOs if you leave a company. If they don't want to do
this, well, there's a reason, and it's not good for you. At minimum, they
intend to crank those golden handcuffs tight, and if you have life changing
events in the 5-10 years it takes a company to go public (want a house,
partner wants to live somewhere else, kids, etc)... tough luck. If you
continue even without a conversion clause, apply a massive discount (on top of
the massive discount you should already be applying) to the "value" of those
options.

As for your anti-tax rant... if you want nice things (roads, schools,
universities, clean air, judges, police, hospitals, child protective services,
efficient postal mail, etc), someone has to pay for them. Charity is no
substitute for our collective choice to pay for things.

~~~
chasing
> As for your anti-tax rant... if you want nice things (roads, schools,
> universities, clean air, judges, police, hospitals, child protective
> services, efficient postal mail, etc), someone has to pay for them. Charity
> is no substitute for our collective choice to pay for things.

Upvoting to support the idea that taxes as a concept aren't the problem, here.
The problem is this obnoxious system of taxing things which likely have no
value.

~~~
avn2109
>> "...police, hospitals, child protective services,..."

Wait, are hospitals taxpayer funded in America? If so, why do they charge my
insurance such vast amounts of money for tiny services?

~~~
zrail
_Some_ hospitals are taxpayer funded. 2/3 of hospitals in the US are non-
profit corporations. The rest are either public (run by the county or state)
or are for-profit.

[https://en.wikipedia.org/wiki/Public_hospital#United_States](https://en.wikipedia.org/wiki/Public_hospital#United_States)

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poof131
My main takeaway is to not work for any startups that don’t extend the window
to exercise options.[1] Employees deserve to get what they earned without
having to take on additional risk. Especially with the extended time to IPO
these days. Why not do this as a company?

[http://www.businessinsider.com/pinterest-will-let-
employees-...](http://www.businessinsider.com/pinterest-will-let-employees-
exercise-options-for-seven-years-after-leaving-2015-3)

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dredmorbius
The part of this story that caught my eye was who bought Gilt: the Hudson's
Bay Company.

Yes, _that_ Hudson Bay Company. Founded in 1670. Among the oldest joint-stock
companies in existence, I'd warrant.

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joshmn
I've always seen equity/stock as an incentive to work my ass off, nothing
more. They equate to nothing more often than not.

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sundaeofshock
I've found cash to be an acceptable incentive to work my ass off. Stock
options are the equivalent of lottery tickets.

~~~
cmrdporcupine
I've always found a cool project, friendly and open team members, good project
planning, and an atmosphere of fun as the only effective incentive to work my
ass off. Money is great but has never been sufficient to induce inspiration
for me.

~~~
rifung
Why are those things an incentive to work your butt off? I see why those would
lead to you being happy at your job, but I don't really see why being happy at
your job means you should work extra hard. Just curious, as it seems to me
those are things which would make someone stay at their job for a long time
but not necessarily work extra hard. After all, it's not like your not working
extra hard would lead to losing to those things.

~~~
icebraining
Some people work extra hard when they really enjoy what they're doing, such as
those athletes that dedicate their whole lives to a given sport.

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bchjam
"We're gonna party like it's 1999 ..."

I guess some things never change, oy vey

