
Don’t Tax Options and RSUs Upon Vesting - mooreds
http://avc.com/2017/11/dont-tax-options-and-rsus-upon-vesting/
======
sulam
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 who didn't know.

[edit: clarified the issue of cap calculation since my original post was in
error. The point doesn’t change.]

Who else gets NSOs? Non-employees, like directors, for instance.

This tax bill is pretty awful. However, it's not obvious to me that it
destroys startup compensation -- ISOs will still be given to most employees,
until you are getting too big for them, when you get RSUs, just like today. If
anything your average tech employee will potentially do better -- I had to
sell a ton of stock simply to pay AMT on the rest of the stock I exercised at
my last startup. AMT goes away in this plan, so people won't have to deal with
that issue.

~~~
hedora
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 engineers end up holding them for years before
they can exercise, so $100K is a small fraction of a normal Silicon Valley
startup, when you divide it out. Many startups take 6-10 years to IPO these
days.

Source on $100K cap: stock plan admins at work, and also this article:
[http://help.capshare.com/knowledge-base/what-is-an-
iso-100k-...](http://help.capshare.com/knowledge-base/what-is-an-
iso-100k-violation/)

Please do not comment on technical nuances of the tax code you do not
understand. Misunderstandings around this stuff bankrupts people all the time.
(especially the type of people that hang out here!)

~~~
jalonso510
"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,
multiplied by your exercise price, and as long as that is under $100k you are
not over the limit and your option remains an ISO. If you're over, then the
portion that exceeds $100k is treated as an NSO, but you can still get ISO
treatment on the other part.

I'm a startup lawyer and having worked with 100+ companies on their options,
it's really not that common to get tripped up on this.

~~~
hamburglar
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.

~~~
jalonso510
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 exercise), so sometimes you will see that too.

Or, if you want a longer than 3 months exercise period post-termination,
you'll do an NSO instead of an ISO.

But otherwise, yeah, maybe just a mistake.

~~~
sk5t
My employer has issued _all_ option grants as NQSOs (with "normal" 4 year
vesting, but also with 90 day exercise or forfeiture, with FMV clawback right,
with rather tepid spread between preferred and common after seed). I'll be
charitable and suppose the big old law firm wrote this out of startup
inexperience and a very strong dose of CYA. Any suggestions on what to do
about this?

~~~
jalonso510
Sounds pretty unfriendly, but no, no suggestions really - it's up to the
company what they want to give you and some companies are just stingy like
that. Wish I had something more for you.

------
austenallred
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 options anymore, which would make it impossible for startups
to compete with large, cash-rich incumbents. That should be the last thing you
want if your goal is for an economy to grow.

~~~
exelius
> 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 -- because
there are very few companies that can absorb a nine-to-ten figure investment
and do something productive with it.

Just because the system as it exists right now would be destroyed doesn't make
this a bad change. The system right now is overly complicated, leads to
workers abandoning in-the-money options or staying at a job they hate, and is
heavily slanted towards early employees.

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.

How we treat them for tax purposes is a different problem, but it should make
the RSU liquidity problem less troublesome (e.g. you can sell some of your
crypto-RSUs back to the company in exchange for ETH/BTC, then convert back to
USD and pay your taxes).

~~~
rsynnott
> 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.

~~~
exelius
I think the key here is that the valuations would change and likely be far
more realistic. We certainly haven't seen the whole story on cryptocurrencies
to know what regulation needs to apply, so I'll withhold any speculation
there. But I have a feeling that with the amount of data a blockchain-based
security gives you, the need to restrict non-publicly traded entities somewhat
goes away (since you can always audit after-the-fact if the ledger is
distributed).

In any case, the market would be far more liquid. I'm not a huge fan of
cryptocurrencies for personal use, but I absolutely think they're going to
take over the world when it comes to the money used in investment finance
(which is ~99% of the money on Earth).

~~~
austenallred
Why would valuations change and be more realistic if you tax illiquid stock
people can’t afford to pay taxes on the gains of?

Valuations would be artificially low if that were the case.

~~~
exelius
Not artificially low; the idea is to increase liquidity by tying said
currencies to semi-liquid ETC/BTC (or whatever).

Right now, most post-money valuations are artificially high, which has its own
set of problems. These companies are being valued as if they had already
accomplished their objectives, and it’s solely because the lack of liquidity
allows (and after several rounds of funding, requires) VCs to obfuscate
reality and get big valuations that drive big headlines which become self-
reinforcing.

In any case, it’s all speculative now, but in 2 years I bet we have this all
figured out; and the regulators will probably catch up a few years after Trump
is gone. Cryptocurrency has hit the critical inflection point where big banks
are building platforms around blockchain. It’s not like this stuff isn’t
already core business for Goldman et al.

~~~
Buge
I fail to see how cryptocurrencies help here at all. The only thing they do is
take stuff that could be done by trusted accountants and lawyers and move it
to computers. This is useful in the case where you're in a lawless wild west
jurisdictionless hacker internet, or if you can't pay lawyer or accountant
fees. But these startups can afford accountants and lawyers to set up
contracts, and they are in the US jurisdiction so they can sue if the
contracts aren't followed.

So what real change do cryptocurrencies bring here?

~~~
wpietri
I'm with you. The post you're replying to seems like hype word salad to me.
E.g., the big-bank experimentation with blockchains I've seen has nothing to
do with cryptocurrency; they're just looking at reliable distributed
recordkeeping.

Making stocks more liquid early on is the last things startups want; if they
effectively become publicly traded, the SEC is going to push for a great deal
of transparency that will be at least expensive and possibly harmful.

------
eldavido
I think the way we do options in startups needs a more fundamental rethink. I
wouldn't be too sad if the current system falls on its face.

I like Buffett's proposal from a few years ago. They don't grant stock, they
simply pay cash (bonuses) and if employees want to buy in, it's their money,
after all.

What's really needed is a way some group of insiders in a company can transfer
shares among themselves or outsiders. This would probably take a big change in
securities laws to create rules around how unaudited equities could be traded.
But I keep seeing these stories about AMT, employees leaving who never vest,
golden handcuffs, etc., it makes me think we need to make private company
stock work more like public company stock, somehow.

Another thought: Zuckerberg has said a few times he doesn't think going public
was as bad as people said it would be. Maybe the solution is for companies to
become public earlier and have investors operate more like PIPE shops or
activists who just hold big chunks of company stock?

~~~
austenallred
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.

~~~
oneshot908
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 to be the CTO of his startup. I wouldn't have, but everyone has to
follow their path, right?

~~~
austenallred
It all depends. It’s certainly hard to compete with a $500k/yr sure thing, but
personally I’d rather have a $150k/yr salary with a chance to retire if the
company does well than a sure $200k/yr. It just all depends.

Risk-adjusted, the best way to get returns is probably to take an equity-heavy
stake at a post-series-B startup with obvious growth and product market fit.

~~~
optimuspaul
I used to feel that way too until I tried it multiple times. All of the
startups I've been involved with have been buried or purchased with deals that
made my options worthless or effectively worthless (i.e. needing to come up
with enough capital to execute the options for such a meager gains that it was
hardly worth the effort).

~~~
austenallred
On the other hand I know hundreds of people that this kind of equity made
millionaires.

------
cletus
So we need to split this issue between companies that are public (or otherwise
have liquid equity) and those that don't.

For the big companies it's pretty easy. They're largely RSU based. Shares are
vested/released. Many companies allow full autosale. Easy. Even in the case of
selling enough shares to cover withholding your still left with something very
liquid.

Options in public companies are in basically the same boat.

The tricky one is early stages startups.

If you have options that have an exercise price at or over market value then
you can take a Rule 83(b) election to defer your entire tax liability til
exercise.

If the exercise price is below market then that would mean paying tax on the
entire grant even though you may never receive it. Easier option for founders
than employees.

Either way it doesn't cover grants along the way.

I do think it's a reasonable complaint to get taxed on something you can't
liquidate.

So two things jump out at me:

1\. Issuing RSUs in a non-public company send like a bad idea. Does anyone
actually do this?

2\. The vast majority of tax revenue would come from FAMGA shares which are
already taxed so what's actually going to be gained by this? Or is executive
compensation (ie ISOs) able to get favorable treatment already? This reason
sooner makes it seem like a bad idea.

EDIT: an answer to my own question (emphasis added):

[https://www.recode.net/2017/11/12/16640530/uber-peace-
deal-r...](https://www.recode.net/2017/11/12/16640530/uber-peace-deal-ready-
softbank-tender-offer-proceed-board-billion-dollar-travis-kalanick)

> Under terms of the deal agreed on, those eligible employees with stock
> options are capped at selling half their holdings ( _and those with
> restricted stock units cannot sell in this round_ ).

So apparently some Uber employees have RSUs and Uber obiously public or
liquid.

~~~
tome
> I do think it's a reasonable complaint to get taxed on something you can't
> liquidate.

One way to sidestep this would be to force the taxing authority to take some
of the options as payment, rather than cash. You've been granted 100 options
at a value of $x each and the tax rate is 20%? Just give them 20 options. That
way it doesn't matter what x is or whether the market is liquid!

~~~
solipsism
But who would manage this federal portfolio?

~~~
tome
The IRS would just immediately liquidate the options on the open market. Oh,
there is no liquid market! So if the IRS can't do it why should individual
startup employees be required to do it?

If the IRS are going to say that 100 options are worth $100x and charge tax
based on that then they should be willing to accept 20 options in lieu of
$20x.

~~~
briandear
So much this! If they seize a boat for non tax payments, they can auction it;
it would be interesting if there were a secondary market of buying shares in
startups at an IRS auction.

The fair market value of something is whatever you can sell it for, not what
someone says it’s worth. Taxing something that can’t be converted to tangible
value is just wrong. They are basically taxing potential and not reality. They
are taxing the egg based on what the resulting chicken might be worth.

------
ransom1538
"The current draft of the Senate Tax Reform Bill would tax stock options and
RSUs upon vesting."

Ok. I wouldn't panic here. Calm down.

How shares are vested is up to the board. So, if this were to pass I would
just walk into the CEO's office with a few employees and ask to change how
shares vest to: "Upon the vesting schedule AND a written letter from the
employee requesting vesting. If the letter isn't submitted the shares are not
vested." So, if I don't send a letter to the board the shares do not vest. If
I want to vest 12 months and leave, I would just submit the letter. Problem
solved. How shares are vested is totally made up. You could have them vest
when you wear a purple shirt on tuesdays.

~~~
ddlatham
I doubt that it's that simple. For tax rules, it's likely more about the
notion of when the employee has the effective right to it. If the employee has
the right to it, via being able to write a letter requesting it, then it's
already vested from the perspective of the IRS, regardless of what word games
you play.

~~~
ransom1538
[deleted]

~~~
jeffdavis
I think the law has language about how it's vested unless a substantial amount
of additional work required of the employee (e.g. continued employment).

It's like if a company receives a bill for something they bought in 2016, but
don't technically pay it until 2017, the bill would still show up in their
2016 reports.

~~~
cbr

        if a company receives a bill for something they bought
        in 2016, but don't technically pay it until 2017, the
        bill would still show up in their 2016 reports.
    

Yes if you're using accrual basis, but not if you're using cash basis:
[https://en.wikipedia.org/wiki/Basis_of_accounting](https://en.wikipedia.org/wiki/Basis_of_accounting)

(Any big company will be using accrual basis, though.)

------
sidlls
I don't think I'd ever accept RSUs that I could not instruct my broker to
liquidate to cover taxes immediately for. I'd either turn down the offer or
require more cash salary instead. I've never worked in a place where RSUs
weren't released simultaneously with vesting so that the broker could
liquidate them for taxes on the gains realized by the value-at-vesting of the
stock (the proceeds of the sale are also taxed).

As that's only applicable to publicly traded companies, I don't think this
bill is a good idea. I think the start-up world's use of options and equity is
not healthy, but there's a big difference between a person whose
options/equity grants are a relatively small fraction of his compensation and
true stakeholders/executives who have a significant fraction (often the
majority of it) of their compensation in the form of equities. The tax code
shouldn't treat these workers the same.

------
neom
This is awful. Now, if your founder/lawyer was kind, you CONVERT the ISO stock
to NSO upon leaving the business and increase the excursive window, so they
are not NSOs till the employee leaves the business. (NSO tax per vest, ISO tax
on exercise)

The way it works in my business is: you have regular ISOs, you vest, you
leave, we convert to NSO and give you 8 years to buy them. You're not vesting
anymore, so you sidestep the vesting tax associated with NSO, and you pay the
cap gain in 8 years. This is the most employee friendly way to structure
things as not everyone has liquidity to deal with what they have earned (both
buying the grants and the tax associated with buying the grants).

Under the new plan, the rule around NSOs being taxed per vest (remember when
you leave you're not vesting anymore) will be applied to all types of employee
stock option compensation. That's madness. Personal opinion: On the plus side,
maybe salaries will go up and stock grants will go down (imo unhealthy). It
will also push more 409a. :\

(Edit- My COO says: julie [11:57 AM] that provision is already being softened
in the latest amendment btw)

~~~
hamburglar
I can suggest another employee-friendly way, which my previous company did for
me as a one-time thing, but I would like other companies to learn from and
make more common: They allowed me to exercise my options and then, so I could
cover the taxes, arranged a sale between me and one of their other investors
for a small portion of my shares. It worked out beautifully.

------
mmanfrin
I remember reading about a nightmare scenario of earlier Uber employees having
to give up hundreds of thousands (or possibly millions) of dollars because of
how their options were taxed. It has since changed, I believe, but it used to
be that:

Upon leaving the company, they would have 90 days to exercise options. If
they'd been there for a couple years during the fast growth phase, it's
possible they had (e.g.) $500k in options with a strike price at $10k. Uber
prohibited secondary market sales, so if you exercised your options, you had
to hold on to them until IPO. However, you;d have to pay taxes on the gains on
those vested options _despite being unable to sell them_. Suddenly you were on
the hook for $171,500 in taxes ($490k * 35%) plus the $10k to vest as you quit
your job -- or else lose out on $318,500 in value on those options. It led to
a real golden-handcuffs situation where engineers couldn't really leave
without walking away from fortunes.

~~~
chimeracoder
> Upon leaving the company, they would have 90 days to exercise options. If
> they'd been there for a couple years during the fast growth phase, it's
> possible they had (e.g.) $500k in options with a strike price at $10k. Uber
> prohibited secondary market sales, so if you exercised your options, you had
> to hold on to them until IPO. However, you;d have to pay taxes on the gains
> on those vested options despite being unable to sell them

Unfortunately, this applies to every successful startup that issues options
(instead of RSUs). It's not just Uber.

~~~
mmanfrin
The difference is that in most situations you can sell vested options on a
secondary market, Uber made it a contractual requirement on vesting that they
could not be sold on any secondary market (they could only be sold back to
Uber for the strike price).

~~~
chimeracoder
> The difference is that in most situations you can sell vested options on a
> secondary market, Uber made it a contractual requirement on vesting that
> they could not be sold on any secondary market (they could only be sold back
> to Uber for the strike price).

After Facebook learned this lesson the "hard" way[0], that's actually pretty
standard. Every startup started within the last 5+ years has this same
provision in their options, if you read the fine print, and older companies
all amended their option terms for new grants.

[0] hard way for Facebook, not for the employees.

------
api
This is pretty awful. It would kill the ability for startups to compete with
large companies for top talent. There is no way startups can afford the
salaries that Google, Facebook, etc. can offer.

It would also break the machine that mints new angel investors. A huge
percentage of angel investors are people who got rich off options/stocks in
growth companies.

This really seems explicitly anti-entrepreneurship and pro incumbent mega-
corp.

Of course it also might have another (possibly unintended and not all bad)
side effect: to drive startups out of Silicon Valley and other high salary
high cost of living enclaves. A startup _can_ offer very competitive salaries
in many other places. Put a startup in Ohio or Michigan and $80-$100k can get
you the best talent available on the local market... especially if you also
offer much more interesting problems to work on than the enterprise salt mines
that tend to dominate IT employment in those places.

~~~
ubernostrum
_It would kill the ability for startups to compete with large companies for
top talent._

Not to go on too much of a tangent, but: the fact that companies think they're
competing with Facebook and Google for the same tiny pool of people, and that
that tiny pool of people is the "top talent", is one of the big problems in
our industry.

See things like this article:

[https://danluu.com/programmer-moneyball/](https://danluu.com/programmer-
moneyball/)

Or this comment:

[https://news.ycombinator.com/item?id=11290662](https://news.ycombinator.com/item?id=11290662)

------
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.

~~~
uiri
When does the clock for long-term capital gains start?

Better solution: the US tax code should eliminate the short-term/long-term
capital gains distinction and just copy the model used in Canada (and
elsewhere, I'm sure): capital gains are taxed as ordinary income at a rate of
50¢ on the dollar. So $2 capital gain is equivalent to $1 of ordinary income.
The usual rules apply for day traders and such where their "capital gains" are
active rather than passive income. The rate doesn't have to be 50 cents - it
can be 40 or 60.

~~~
acjohnson55
I'd start the clock either at grant time or vest time. After all, that part of
your comp is locked up and you're investing your sweat equity in the company.

------
koolba
> 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 growth tech companies will not be
> able to offer equity compensation to their employees.

Nothing stops you from offering it. It's up to the potential employee to
accept it, weighing the possible tax liability.

> We will see equity compensation replaced with cash compensation and the
> ability to share in the wealth creation at your employer will be taken away.

In the vast majority of cases startup equity isn't worth the paper it's
printed on. Paying their employee bonuses with cash would be a net win for
their employees. The "losers" in this situation are established companies that
arguably are already in a good position to pay out bonuses in cash (or at
least include a cash component to cover taxes).

> This has profound implications for those who work in tech companies and
> equally profound implications for the competitiveness of the US tech sector.

I really doubt that. The talent pool, networks, and legal infrastructure in
the USA are second to none. That's not going to suddenly shift because of
minute changes to tax law.

~~~
seattle_spring
> I really doubt that. The talent pool, networks, and legal infrastructure in
> the USA are second to none. That's not going to suddenly shift because of
> minute changes to tax law.

Working for a startup is already immensely risky. If there was a practically
guaranteed bankruptcy risk as a result of appreciating stock options, no sane
employee would work for a startup anymore-- they would all go work for the big
companies offering liquid stock. That, to me, is a very profound impact on our
industry.

~~~
richardwhiuk
Or startups could pay, you know, salary + bonus like the rest of the world?

~~~
walshemj
That's not the point one of the reasons for Woking at a start up its to make
FU money - and big companies also offer stock options not very few FTSE 100
companies don't have share schemes for their employees for example.

~~~
uiri
Actually curious: Why are you talking about British companies in a thread
about American taxes?

Or do you happen to be British so you use FTSE 100 as a shorthand for what
most Americans would use the S&P 500 for?

~~~
walshemj
I was contrasting the experience of share schemes in the UK which are a no
brainer with effectively zero tax implications rather than the currently
broken system the US has

------
bnjmn
Here's the statement I plan to read to my representatives:

I live in Greenpoint, Brooklyn. I work for a small startup of less than 30
employees.

Three years ago I left a large, publicly traded tech company to take this job,
because of the potential I saw in the work the startup was doing.

I took a significant pay cut when I joined the startup, a decision that was
justifiable only because of the distant future value of the incentive stock
options that the startup promised me.

It is my understanding that the current tax bills on the floors of the house
and the senate would tax these options when they first vest, long before I
could possibly sell them to cover my tax bill.

If I am wrong about this, I would appreciate any clarification you can
provide, ideally written into the text of the bills themselves.

If my understanding is correct, I honestly don't know how my startup, or other
small companies like it, will be able to compete with wealthy public tech
companies as we try to hire new employees in an already extremely competitive
market.

I struggle to understand how draining talent from the most innovative small
tech companies can possibly be construed as a good thing for our economy.

Thank you for your time.

~~~
JonFish85
It may be an interesting exercise to think of how this can be turned "against"
you. If you wanted to play armchair politics, you could spin this:

\- Highly paid engineer walked away from a 6 figure salary

\- Takes a job at a small company where he gets equity that could potentially
be worth millions.

\- Complains that he may have to pay taxes on a significant portion of his
compensation.

Put those together, and you have someone probably still making more than
double the national median wage complaining that his favorite tax loophole is
being closed. Meanwhile the local plumber / school teacher / single mom is
struggling to make ends meet; why shouldn't you pay your fair share so that
they can get a tax break?

FWIW, this is just an exercise, I'm not saying this is true. Just something to
keep in mind though, that many (most?) of the people on HN are being paid
significantly higher than most Americans, and complaining that their stock is
being taxed differently isn't going to garner much support.

~~~
kelnos
I think the "easy" rebuttal to your third point/counterargument is that's not
what's actually happening: you're being forced to pay taxes on vapor. No one
is objecting to paying tax when stock is sold; that's normal and reasonable.
It's just crazy to expect people to pay taxes on something that cannot be
sold.

------
spullara
The text of the bill specifically says that it is not intended to apply to
statutory options (ISOs).

From page 123:

"However, it is intended that statutory options are not considered
nonqualified deferred compensation for purposes of the proposal. An exception
is provided for that portion of a plan consisting of a transfer of property
described in section 83 (other than nonstatutory stock options), or a trust to
which section 402(b) applies, or relating to statutory options under section
422 or 423 for which there is no disqualifying disposition."

~~~
StevePerkins
Do you have a link to the actual bill?

~~~
spullara
Link to the bill with before / after descriptions. Starts at page 116:

[https://www.finance.senate.gov/imo/media/doc/11.9.17%20Chair...](https://www.finance.senate.gov/imo/media/doc/11.9.17%20Chairman's%20Mark.pdf)

------
seattle_spring
I'm 90% certain that "taxing stock options upon vest" only refers to non-
qualified stock options. ISOs, which the majority of startup tech employees
with incentive options get, would not be taxed upon vest.

RSUs and NQOs would fall under the new definition, and holders would be
screwed. I just want to make sure we all have our definitions straight.

~~~
kelnos
This doesn't really affect RSU vesting much for publicly-traded companies.
Under the current regime, RSUs are taxed on delivery; for a publicly-traded
company RSUs are usually delivered at vest time.

I don't object to taxing NSOs at vest time all that much; for rank-and-file
employees ISOs are the norm, and NSOs are usually for highly-compensated execs
whose grants easily pass the ISO per-year vesting cap. They're the kinds of
people who are likely to be able to afford these taxes without liquidity, and
who are probably able to take advantage of a bunch of other tax loopholes
anyway.

The downside there is for companies that give employees more than 90 days
after termination to exercise their ISOs (which by law must be converted to
NSOs after 90 days)... I imagine that conversion might trigger a taxable event
under these new laws.

------
aresant
"But, sadly, I don’t think this is really about what makes sense. It is about
politics."

Clearly this proposal is targeted directly at private SV and tech companies.

And the mortgage deduction and state tax write off proposals are targeted at
California / NY.

Outside of just a big FU from the Republicans to largely Democratic states
what is the end game?

E.g. - what are the Republicans actually negotiating for, assuming points like
the RSUs are proposed as leverage vs real reform?

~~~
briandear
State tax write offs are fundamentally unfair. The US government effectively
subsidized high tax states.

A guy making $100k in Texas ought to have the same exact tax federal burden of
a guy making $100k in New Jersey. As it stands now, those two guys pay a
different amount to the federal government. That is unfair. A state can raise
state taxes will little impact on residents however it results in lower tax
revenue to the US government and more revenue to the specific state.

High tax states hate giving up that deduction because they would effectively
be giving up a subsidy.

~~~
nsxwolf
Don't you have to do more work to make a claim about who is subsidizing who?
How much does each state receive in federal grants and aid?

And the guy in Texas has more money in his pocket than the guy in New Jersey
no matter what. It's a weird thing to get hung up on. Nobody ever talked about
the fairness of this deduction before. This was cooked up as a GOP talking
point in some smoke filled room somewhere. Class envy as a Republican tactic
is a curious development.

~~~
briandear
Federal grants and aid is a seaparate issue. I’m Ron Swanson when it comes to
that. I want a smaller federal government period. State and local governments
should have the power.

~~~
nsxwolf
It's not a separate issue if someone is making the charge that he (a taxpayer
from a state with no taxes) is subsidizing me (a taxpayer from a state with
taxes) - when it could very well be the case that I'm actually still
subsidizing him.

------
jeffdavis
The problem is taxing illiquid gains. If they are liquid, vesting time is the
logical time to tax them.

Conversely, taxing at exercise time doesn't really make sense for illiquid
gains and more than vesting time does. People have problems with this now.

The real challenge would be to fix this without creating an incentive to keep
gains illiquid when they could be liquid.

------
dcosson
Is there any chance companies could fairly easily adapt to this? For instance,
grant 30% more equity per year than they otherwise would and buy back that 30%
as it vests to cover taxes.

Edit: Now that I think about it those numbers don't work because it's an extra
cost for the company to buy back your stock. So you end up with fewer shares
with this scheme, but the company has also effectively paid off your "golden
handcuffs". So in some cases it should even out in the end (you don't pay
those taxes in a liquidity event) and in other cases it's actually better for
the employee (you can afford to keep more of your equity if you leave before a
liquidity event).

------
Dowwie
Republicans don't cut deals with the commons. Their constituents can fit in a
moderately sized ball room. Look to who will benefit by these changes and you
will find the reason why they are planned.

Incumbents write PAC checks.

------
BeetleB
>What this would mean is every month, when your equity compensation vests a
little bit, you will owe taxes on it even though you can’t do anything with
that equity compensation.

I'm not sure what he means with regards to RSUs.

When my RSUs vest, I am taxed on them currently. _And_ I can do whatever I
want with them. My employer gives me RSUs with a 4 year vesting period - a
quarter vests every year. And every year a quarter of those stocks are given
to me to do whatever I want with them.

Perhaps he was referring to something other than RSUs? Or it is only relevant
for private companies (which all startups are)?

~~~
t_fatus
You can do everything with them if they are publicly traded, if not what are
you going to do ? If you're working in a early stage company which can see its
valuation goes north (probably one of the reasons you work there instead of
google btw) you could try to convince someone to buy some of your stock each
month to pay for these vested shares you just get ?

------
tschellenbach
I've had a similar tax issue which caused a few 100k in taxes on unrealized
gains. That was not a happy day and I could barely pay the tax bill. In my
case the issue involved moving from The Netherlands to the US. As far as I
know the US is one of the only countries which taxes unrealized gains. In The
Netherlands you only get taxed once you actually make the money. The VC
industry is world class here in the US, but some of these tax rules are so
backwards that they do real damage to startups and the economy as a whole.

~~~
nemo44x
There is a provision in the House version of the tax bill to not tax the
exercising of options until there is a liquidity event. In that case you
wouldn't be taxed on the unrealized gain until you could sell the stock.

I still think with options it should be as you've pointed out a tax-free event
until you actually sell the equity for cash.

------
kevinburke
A friendly reminder that it's VC's like Fred Wilson who insist on provisions
in option grants that require exercise within 90 days of leaving a company.

~~~
chimeracoder
> A friendly reminder that it's VC's like Fred Wilson who insist on provisions
> in option grants that require exercise within 90 days of leaving a company.

Well, except that the IRS also has a say in this as well. The IRS won't let
companies issue ISOs with no expiration date like that; if the company tries,
they'll be treated as NSOs for tax reasons, which defeats the whole point.

There was actually a bill last year that would have fixed this specific
situation (taxation of ISOs for startup employees in a way that doesn't expire
3 months after termination), but the Senate _Democrats_ blocked it, because
they branded it as a "tax cut for the wealthy".

~~~
kelnos
> if the company tries, they'll be treated as NSOs for tax reasons, which
> defeats the whole point.

How does that defeat the whole point? The entire point of ISOs is that you can
exercise without being taxed immediately. After leaving a company, I would
much rather have NSOs that I can hold onto, unexercised, until after a
liquidity event when the alternative is having nothing.

(I mean, really, though, overall the need for ISOs is ridiculous: the US is
insane for taxing unrealized gains in the first place.)

~~~
chimeracoder
> How does that defeat the whole point? The entire point of ISOs is that you
> can exercise without being taxed immediately.

Not exactly - you're still taxed, but only via AMT, not regular income tax.

> After leaving a company, I would much rather have NSOs that I can hold onto,
> unexercised, until after a liquidity event when the alternative is having
> nothing.

Sure, but that's not really an option either. NSOs _also_ expire (and again,
the requirement for having an expiration comes from the IRS). So if the
liquidity event takes too long to happen, you might still end up with nothing.
There are a number of companies that are already bumping against this problem.

> (I mean, really, though, overall the need for ISOs is ridiculous: the US is
> insane for taxing unrealized gains in the first place.)

That's not what's happening. ISOs exist in order to allow companies to provide
shares to employees _below_ market rate at the day they vest. The difference
between market rate and the actual rate paid is taxable, because that _does_
represent a gain realized.

This is only a problem for companies that expect to grow rapidly (ie:
startups). If the growth rate is low, the spread isn't large enough to hit the
thresholds to be taxed - or, if it is, not large enough for those taxes to be
burdensome. But since startups plan to grow very rapidly, everyone (from
founders and early employees to late-stage-but-pre-IPO employees) get the
short end of the stick.

~~~
kelnos
> Not exactly - you're still taxed, but only via AMT, not regular income tax.

Well, sure, but that's not always the case, and I don't consider that regular
taxation. (I'm well aware of AMT rules, having been subject to paying AMT the
past two years due to this exact issue.)

> NSOs also expire (and again, the requirement for having an expiration comes
> from the IRS).

So what? I'd rather have an NSO that expires many years down the line (a
figure I see from a lot of companies that do that conversion is 7 years, which
is usually plenty) than nothing.

> That's not what's happening. ISOs exist in order to allow companies to
> provide shares to employees below market rate at the day they vest. The
> difference between market rate and the actual rate paid is taxable, because
> that does represent a gain realized.

Not sure what you mean. NSOs behave in the same way wrt to what the company
can offer, and as to what's taxable; ISOs just allow you to defer that
taxation until sale (aside from the aforementioned AMT annoyance), and also
(assuming you make a qualified disposition) treat the entirety of the gain
from the strike price as a long-term capital gain. (See
[https://www.theventurealley.com/2016/10/isos-vs-
nsos/](https://www.theventurealley.com/2016/10/isos-vs-nsos/))

------
SZJX
One thing I don't get though is how eventually it has "profound implications
for the competitiveness of the US tech sector". If the employees now wouldn't
want to be compensated with options because of the tax, can't they be
compensated in some other form, e.g. cash? Eventually isn't it still the
company and the employee that negotiate the compensation scheme, and
essentially the company's decision how much to pay?

The most obvious thing that I can currently think of is just that maybe the
startup just doesn't have that much cash in the initial stage, so raising
wages to even higher would just bankrupt it, while options is something that
would only cost the company money if ever it actually succeeds, thus it can
afford to give options away. If one thinks of it in that way then maybe it
would make slightly more sense?

------
ajmurmann
Can someone explain how the taxable amount would be calculated if the company
isn't listed on the stock market. My options are for value x per share. I
would expect to pay taxes for y - x with y being the market value. How does
the actual market value get established? Will that number just come from what
was used when someone invested previously?

~~~
buckhx
Fair Market Value determined by a 409a valuation.

~~~
bgentry
Interesting side note. This proposed legislation actually completely removes
section 409A from the tax code and replaces some parts of it. I’m not sure if
the rules around company valuation will change dramatically but it seems that
they won’t be called 409A valuations anymore if this passes:

[http://bakerxchange.com/rv/ff0034eed7a7d447f644f491d94caddcb...](http://bakerxchange.com/rv/ff0034eed7a7d447f644f491d94caddcbfd115c7)

------
lowbloodsugar
"And that would be the end of equity compensation in startups as we know it."

Good. This entire industry is a lottery. We all laughed at the slot machines
in the hospital in the movie "Idiocracy". "You could win free health-care!"
And yet we're all hoping to win a life of luxury on the start-up lottery.

------
bgentry
Here is a more detailed analysis of these parts of the proposed tax bill:
[http://bakerxchange.com/rv/ff0034eed7a7d447f644f491d94caddcb...](http://bakerxchange.com/rv/ff0034eed7a7d447f644f491d94caddcbfd115c7)

------
rothbardrand
Startup Options are already broken-- no liquidity, terrible employee hostile
terms (eg: 1 year cliff, losing 90 days after leaving unless you come up with
$xx,xxx to exercise options for a stock that won'e be liquid for 5 or more
years, etc.) and on top of that the distribution is usually highly weighted
towards MBAs to the detriment of the engineers who actually build the product.

So a new model has emerged: cryptocurrency tokens. While ICOs are often
scammy, for startups whose business model fits in the form of a currency, this
is a better way to reward employees. Liquidity and actual ownership rights...
and "vesting" is easy-- just issue them a fixed number per month.

------
rb808
Surely if you have options or stock in an illiquid company where you can't
sell it - they are worth zero on a mark-to-market basis, so you dont need to
pay tax on it?

If you can easily sell them for a price it makes sense that you pay tax on it.

~~~
Randgalt
If only life were that logical. Under the rules as they are today, there are
many scenarios where illiquid options/stock have a taxable event. People's
finances have been ruined by this. I had a friend lose a house when he sold
his company for stock.

------
xfactor973
I don’t quite follow how this is different. When I got rsu’s at my former
company they sold a bunch at every vest date to pay for taxes. Isn’t that the
same as what they’re talking about here?

~~~
seattle_spring
Was your company publicly traded? The OP is referring to issues when the stock
is illiquid.

------
sanj
What happens when your vesting options are underwater?

Do you get to claim them against your taxes?

If so, given the rate of startup _failures_ , this may be of net benefit to
most startup employees.

~~~
kelnos
It's fairly uncommon that your options will be under water when they _vest_ ,
even in a startup that eventually fails. The more common -- and more crappy
scenario should this law pass -- is getting taxed on a paper gain, and then
_later_ the price drops below the tax basis due to a down-round or something
else bad.

------
xchaotic
Fortunately I am tax resident in a country where I will pay taxes on my stock
(options) no sooner (actually up to a year later) than when I make money off
them with a simple CGT tax. Taxing options before they are exercised and
before people made actual dollars off them is just crazy. Unless you are a
founder, stock options is just a nice lottery ticket on top of your salary.

------
enra
Fenwick also had some more information about the bill:
[https://www.fenwick.com/publications/Pages/Proposed-Tax-
Refo...](https://www.fenwick.com/publications/Pages/Proposed-Tax-Reform-Bill-
Stands-to-Significantly-Impact-Equity-and-Performance-Based-Compensation.aspx)

------
VeronicaJJ123
Lol. if this bill passes I am resigning from the current startup and joining
Google or Facebook. This is idiotic.

~~~
tschellenbach
Yes, as a startup founder I'm quite worried about that exact effect.

------
skywhopper
I'm a little confused about the mechanism here because the author doesn't
explain what's going on or how, or cite any sources. I thought RSUs were
already taxable immediately upon vesting. But admittedly I'm not deep into
Valley compensation culture. What's changing here?

------
kolbe
Serious question here. My impression is that Silicon Valley leans heavily
liberal, and as such most people there believe in a progressive tax structure
and generally lean towards wanting the government to receive more revenue than
conservatives. If my impression is wrong, then please correct me.

With this in-mind, why is there such outrage about taxing option and RSU
income? It's still income. And the current situation could not be described as
anything but a tax break for the "wealthy," at least insofar as Obama liked to
define people as wealthy. It's an asset that you receive in connection with
your labor. It's income. And you don't have to pay income tax on it (iirc,
it's mostly cap gains when exercised). And it's mostly given to people who
already make $150k+ a year anyway.

I cannot reconcile this outrage over still having a tax dodge (but not as good
of one) with the political leanings of SV.

~~~
heimidal
It's not income if you never exercise the option.

Imagine starting as a senior-level manager at a company that's a few years
into its life. They provide you with a salary of $150k/year and 100,000
options at $1 with a standard four-year vesting schedule. In the first year,
the company's fair market value increases to $2/share. Your tax liability just
increased as though you made an extra $25k, so you'll need to come up with
~$8k to cover.

If the company sees its value increase 2x per year for all four years, you'll
be on the hook for taxes on $675k having only made $600k in actual dollars.
Good luck scraping together taxes to cover adjusted income of $525k in year 4
if the company doesn't go public.

If the fair market value falls after you vest but before a liquidity event,
you never saw a penny of extra liquid assets but still had to pay tens or
hundreds of thousands in taxes.

This will bankrupt people.

~~~
kolbe
That sounds no less fair than someone who bought a home for $100k in 1980
who's seen its value appreciate to $5mm, and now has to pay $50k a year in
property tax.

That sounds no less fair than a family liquidating its estate because they
can't afford the estate taxes.

That sounds no less fair than a health-conscious person taking care to never
drink or do drugs paying 10x more for socialized healthcare to pay for the
ailments of an obese alcoholic.

I doubt I need to go on, but the point is that taxation sucks. And it's
completely hypocritical of someone to want to levy these burdens onto someone
else while they themselves become indignant over a tax loophole of theirs
being tightened (not even closed). It's even worse that the people who are
getting indignant over it are some of the wealthiest in the United States,
while at the same time, you want to stick a guy who earns $50k a year with an
extra $3k with the ACA.

I do admit that the story you provided sounds like it sucks more than average,
but in reality, a bank will just give you a loan to cover the taxes. No one is
going bankrupt. And if the shares end up going to zero, you get to have
capital carryover losses just like everyone else whose investments lost money.

But the point is that taxes, when you actually have to get down to it, suck.
And if you're being truly democratic, you should try to empathize with all
taxpayers in the same way that you think about your own taxes.

~~~
greenleafjacob
You can sell a home to cover property taxes, or even reverse mortgage to get
the cash flow. You can't sell private company stock, you can't even encumber
it with a lien.

------
SeoxyS
There are various ways of getting around this tax even if the plan passes:

\- Provide compensation through LLC membership units which vest but have no
value at the time of grant. \- Allow early exercise of options when the spread
is zero.

------
crb002
This should be dead simple. You put 30% of the options in an IRS account. The
IRS either sells them at auction or lets you buy them back at cash value when
you exercise the options.

There should be no liquidity crunch.

------
gms
All a bit moot since companies aren't going public anymore, no? ;)

------
umanwizard
My RSUs have always been taxed on vest -- what am I missing?

~~~
seattle_spring
Is your company publicly traded? The OP is referring to issues when the stock
is illiquid.

~~~
umanwizard
Yes it is publicly traded. So, how does it work with privately traded
companies. Talking about RSUs, not options. What is the difference between
"release of the underlying shares" and "vest" ?

~~~
seattle_spring
The proposal is that the employee will have to pay tax on RSUs upon vest, even
though the underlying assets cannot be sold. For example:

Employee A has 40,000 shares of stock granted upon hire, vesting 25% per year.
So on year 1, they vest and have to pay taxes on 10,000 shares. Say those
shares are valued at $25 per share. In a public company, you could just sell
$25 of those shares and be left with 7,500 shares. At the private company,
under the new rules, you'll have 10,000 shares that you cannot sell, but still
be liable for paying tax on $250,000.

Those shares may never be liquid, and this rule can and will bankrupt people.

------
adamw2k
Just used ResistBot.io (full disclosure, a friend's business) to message my
representatives about this.

May not be as effective as calling - but certainly quick/easy.

------
trothamel
Isn't this a change that makes the tax code fairer? It seems like options and
RSUs have value associated with them. At the very least, the person who is
receiving them considers them to have value. Stock options are traded on
markets, and priced some how.

Part of the new tax plan seems to be trying to lower the tax brackets, in
exchange for preventing people from avoiding taxes. That's why it seems to be
doing things like taxing these options and the free food some companies supply
their employees.

It isn't clear why income shouldn't be taxed just because it's supplied in a
different way.

~~~
t_fatus
Options and RSUs gain value the day you pay for the underlying stocks, not the
day you're allowed to buy a stock which could later in time become worthless.
don't forget they're aimed at employees so they can share the value created by
the company they work within, and that these employees will pay taxes in time
when they extract any value from their companies

~~~
kolbe
If they don't have any value, then you shouldn't have any problem with them
going away. You obviously consider them valuable, or else you wouldn't be
defending them.

~~~
t_fatus
Indeed the right to buy a stock is valuable, but as an employee / the state
you should postpone the taxation to when the value is actually retrieved by
the person you tax. It's a bit like saying 'You're house is worth X, you
should be taxed regarding this price, even if you don't have yet made any
profit'

~~~
kolbe
You literally described property taxes just now.

------
herodotus
What does it mean for an RSU to "vest"? My understanding of RSUs is that it
means the company will give you some shares if you still work there at some
specified date. Vesting is a stock option concept - the time at which you can
choose whether or not to sell some of the granted shares. Which means that you
can sell some shares to pay your taxes when the shares vest.

Is the current proposal meant to tax the RSUs when you are told you will be
getting them?

~~~
closeparen
My RSUs vest at the latter of the time-based condition (schedule) and
performance-based condition (company liquidity event). The proposal is to make
this taxable income purely at the time-based condition, when they may still be
illiquid.

------
ktamura
Wasn't part of the original tax reform to repeal AMT? Was that lost in the
Congressional aisle?

~~~
kelnos
A potential AMT repeal is orthogonal to this change.

------
nsxwolf
Anyone know exactly what "Performance Units" are, and if they would fall under
this?

------
Buge
Aren't RSUs already taxed upon vesting? How does this change anything for
RSUs?

~~~
tanilama
My reading is, this change won't affect RSUs those can be traded in public
market. It will, however, have huge impact on paper money, because you are
taxed in advance, and the return might be zero.

~~~
Buge
But my understanding is that RSUs are always taxed in advance (at vest time).
So there's no change in behavior whatsoever with regard to RSUs.

------
nerdsaresingle
As a startup employee, I love this rule as this can help CEOs to go public
sooner than later. Today VCs are the capitalist who take away all the growth
of a tech stock till series’s D and then public pays a premium. If this rule
leads startups to go public at 100Mish range instead of 2-10b, this could be
great.

------
buckhx
Wow and I thought removing AMT was throwing folks with ISOs a bone.

------
dberg
if this passes (doubtful) do you all think we will see a massive surge in
secondary market platforms ?

