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Don’t Tax Options and RSUs Upon Vesting (avc.com)
553 points by mooreds 30 days ago | hide | past | web | favorite | 366 comments



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.


Per the article and my understanding from other secondary sources, the tax-at-vest clause applies to RSUs as well as NQSOs. RSUs are frequently issued by companies that do not have a liquid market. So, tax-at-vest is still problematic for that class of employee compensation.


One would assume that companies would stop doing this and issue ISOs instead.


Its not that trivial. ISO's have a $100k limit.


Yes, but that’s $100k worth of vesting per year based on the value at grant date. Very few situations exceed that in illiquid companies.

[1] http://www.naspp.com/blog/2009/08/iso-100000-limitation.html


> Yes, but that’s $100k worth of vesting per year based on the value at grant date. Very few situations exceed that in illiquid companies.

That's... not rare at all. For a company with a $5 million valuation, you only have to be offered 2% of the company in order to hit that cap. An early employee could easily hit that. And of course, as the company grows, it becomes easier and easier to hit that cap, because it's based on an absolute dollar value (the valuation of a company will always grow faster than the percentage offered will shrink - or to look at it another way, if it doesn't, you probably don't want to exercise those options anyway, so the conversation is moot).


My experience has been that it’s much easier to hit it later vs earlier. It’s very rare to be offered more than 1% of a company that is already worth $5M. The people who get offers like this are, it turns out, the ones complaining about this tax law most loudly. They are not run of the mill employees.

Later, when a company is close to going public, normal packages will often have less growth in valuation assumed and so it becomes easier to hit the cap as a regular employee. That is not coincidentally the same time companies switch to RSUs.

(Someone made the point elsewhere in this discussion that inflation will render the cap more of an issue as time goes on. They have a real point, I think. Combined with inflated A rounds this may start to be more common than it has been in the last 20 years.)


> My experience has been that it’s much easier to hit it later vs earlier.

Yes, I said in my original comment that it becomes easier to hit the cap as the company grows. However:

> It’s very rare to be offered more than 1% of a company that is already worth $5M. The people who get offers like this are, it turns out, the ones complaining about this tax law most loudly. They are not run of the mill employees.

This is not true. It's not really that rare for a first hire to get 1% or more[0], and it's also not that rare to have a company that makes that first hire after raising enough money to be valued at $5M. I say this as someone who has been both a founder and an early-stage investor.

But more broadly: most of the people who are complaining about this cap (and complaining the loudest) aren't the early employees. They're the ones who joined later - late enough that they're likely "only" to double or triple the value of their equity by the time an IPO happens (unlike early employees), but still early enough that there's no IPO or acquisition on the horizon[1].

[0] http://avc.com/2010/11/employee-equity-how-much/

[1] Which, given the increasing tendency of large startups to delay IPOs "indefinitely", basically means "any employee of a privately-held company".


So essentially you have a linear limit to the one part that is promised to be potentially exponential?


> So essentially you have a linear limit to the one part that is promised to be potentially exponential?

It's not a linear limit - it's a fixed (constant) cap, but yes.

This doesn't mean you can't receive more than $100,000 in options, but it does mean you'll be taxed on those as NSOs, which is much higher.

Also, note that because of the cliff, you receive your full first year on a single day, which means that your second year's worth of options are much more likely to exceed the ISO cap and auto-convert to NSOs.


Just keep in mind it’s the value when you join that matters, not how that value grows over time. If you’re not over the cap in your initial grant, you won’t be surprised later (the one exception being refresh grants — which are rare in early stage companies).


Yeah, there's a couple reasons for RSUs to exist and the cap is a big one (the other is shareholder limits). However, the issue is vesting, not the RSU itself. You can delay RSU vesting to happen at a liquidity event and the problems go away. That leads to a bad situation where employees are stuck holding their "earned but not vested" RSUs and can't quit (similar to what already happens to people who can't afford to exercise their ISOs, or even if they can, they get bombed by AMT and don't have a liquid stock to pay taxes with). This seems like a solvable problem. If all it did was cause companies to figure out how to make their shares liquid in some fashion (IPO, secondary market, private exchange -- something) that would be net-positive for employees.


I worked for a company where RSUs did not vest until liquidity event. There were a lot of earned options that people still haven't been able to exercise. People that have been there for over 8 years. I just forfeited mine and moved on to a different company.


This has been the strategy, but the bill is invalidating it:

>“Similarly, awards with vesting triggers based on exit events such as an initial public offering or change-in-control would be taxable on grant unless they require the recipient to be employed through the liquidity date.“

From Fenwick’s analysis.


Thanks for this. I suspect that for most of the situations where people were (mistakenly) freaking out about their ISOs being taxed on vest, they will actually be much better off given the removal of AMT in the bill.


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


How does it apply to options already vested?


It depends a lot on the pricing of that $100K. If that's based on price at time of vesting you run into big problems -- that's not how ISO's work currently but it's unclear exactly what is going to change in this bill. Say you get $50K/year in stock at the valuation based on the time you join the start-up and the start-up has on paper 10X growth in 2 years. In your 3rd year, your $50K of stock is $500K on paper so the last $400K would be over the $100K limit and immediately taxable even though you cannot sell the stock yet. If the tax is setup to make $100K of value at time of employment contract exempt from taxing as ISO's, then the problem is far smaller as the tax events are predictible and manageable.


I tried to be clear above -- the cap is based on the grant value, not the vested value -- ie it is strike price, not 409A (or other) exercise value.

Really, if you think about it, it could only be this way. You can't predict the future value of your company. If I give you an ISO grant now, but the company doubles in value next year and puts you over the cap, we're in a pickle.


The other thing to keep in mind is how much comp is the right to in the future buy $100k present value of stock for $100k. Even if that option prices at 20% the “100k” is only 20k of comp. For many positions 100k/year of stock may be too limiting. If there are ways to manipulate the share value of the class of shares you are getting to a small fraction then it might work. But if this excise price is the VC round price for a worse class of share the amount of comp here is fairly small.


The common vs preferred spread is usually enough to make this a non-issue unless you are a very well-paid executive. This is why I was careful to say the _average_ employee is likely to do better, strictly in terms of startup compensation.


Also — I don't see any problem with forcing companies to compensate employees in cash instead of employer equity. Especially for publicly traded companies, employees can go ahead, turn around and plow that cash into company stock if they want to. (RSUs are just cash in the form of stock anyway.)


The issue is that the companies that most depend on options/SARs/etc. to get off the ground do not have the cashflow. Otherwise it would not even be in their interests to grant equity.


Again, I don't see that as a problem. Instead of paying their employees in cash and dreams, they're forced to just pay in cash. If employees are less keen on the same amount of cash without the dream, too bad for companies too marginal to pay a prevailing wage.


>RSUs are just cash in the form of stock anyway.

That’s an interesting point. They are and they aren’t. Cash as in actual dolla dolla bills they are not. Cash in terms of GAAP liabilities they are. But “stock-based compensation” is generally the largest part of what public tech companies exclude when they report non-GAAP earnings. And the lion’s share of those will be RSUs.

Why do companies think this is a reasonable way to report? (Other than simply trying to look better for non-experts who don’t know how this stuff works.) The most obvious reason from my perspective is that this is a variable cost that is already baked into the model. The variable part is obvious — if I make a promise to give you 300 shares the value side is going to change over time. If our earnings are crappy and everyone sells the stock (to who?!) then the value of your compensation has just dropped. The cost side is also weird — these shares aren’t bought on the open market at time of vest, they are in employee pools that are set aside ahead of time (in fact my understanding is that the usual terms of an RSU require the stock to be set aside at time of grant). So theoretically they should cost whatever the fair market value is at the time the pool was created. Either way they aren’t cash that left the company’s bank account and went to the employee, like regular compensation.

Accounting is hard!


I don't like the government literally making the choice for everyone. It's an incentive structure. It's like taxing a promise note to me that I'll be paid $x dollars in $y years. Options is an incentive which says I can't pay you as well as I'd like but instead I'll share the upside with you. Investors who put in cash are not taxed for the shares they receive. Options should be viewed similarly. It's like sweat-equity in a sense.


Options in a private company are a terrible compensation structure for employees. They're horribly complicated, and even under today's laws taxes are due before any profit is realized. If we want to keep the idea of ISOs as an alternative incentive structure, they should be taxed later rather than earlier — at the time they can be converted into some liquid asset (cash or publicly traded stock).

Practically, ISOs today are used primarily for two reasons beneficial to founders and investors: to pay employees in dreams rather than cash; and to claw back compensation from employees who leave the company (most employees who leave will never be able to exercise their options).


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

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

So this would prevent companies from providing an option extension.


I thought about this, and if the taxation trigger is "tax upon vesting", and the vesting is done when the options are ISOs, I would think that it is possible that this legislation is worded in a way so that an ISO -> NQO conversion does not trigger a tax event.


Is it clear what tax impact the conversion has? Arguably that's the moment when you "vest NSO options", but then the entire tax blow would drop upon leaving the company, which would be particularly bizarre.

(Is the proposed law even clear about how this would work?)


You seem to be bringing up a really good point. From reading the article earlier, I was under the false impression that this applies to ISO's too but looks like it only applies to NSO's. What about non-public RSU's for late stage startups like Uber, Airbnb etc?


Those RSUs are a particular kind of promise, and it makes sense to use RSUs when the company has gotten very valuable because you hit the ISO cap pretty quickly and NSOs already have a tax-at-vest issue. My guess (IANAL) is that you'd just change the promise. "You will vest these RSUs when we go public and you can pay the taxes". I actually think there's _already_ an issue around this, because you can be vesting RSUs while the company is public but you are personally locked out and not allowed to trade them -- and yet you need to pay your taxes and the normal way to do that is to sell a portion of your RSUs. In the case I know of (Twitter), there was a special way of handling that on a one-time basis. I don't remember the exact details (it didn't apply to me), but they managed to work it out.


That seems correct:

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 stock options) or which consists of a trust to which section 402(b) applies.

Page 209 of https://www.jct.gov/publications.html?func=download&id=5031&...

But I'm not sure how this impacts ISOs with an 83(b) election.


I think in an 83(b) you haven't had a gain, same as today, so there's nothing to tax.


Do you have a link to this analysis? I couldn't find it online.


https://www.fenwick.com/publications/Pages/Proposed-Tax-Refo...

> The proposed bill leaves Section 422 of the Code, governing the taxation of ISOs, untouched, apparently exempting it from new Section 409B. As a result, ISOs may continue to offer employees eligibility to receive favorable tax treatment by deferring taxation until sale


Thanks, you beat me to it!


As a consultant who gives price breaks to early stage startups by taking options on a NQSO agreement this is often the only way to avoid getting taxed. This will suck.


Can you link to the Fenwick analysis that this is based on?


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-...

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!)


"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.


What reasons might an early stage company (founders + 3 employees, say) have for giving the employees NSOs instead of ISOs? I was once in this situation and everyone I spoke to about it thought it was a flat-out mistake on the company's part, but I've always wondered if there was another reason.


Only a couple or reasons they'd deliverately do that. Most common is if the employee is outside the U.S. and not a U.S. taxpayer, making the distinction irrelevant.

Or, if you plan to early exercise immediately upon receipt, you actually are better off with an NSO (due a shorter holding period for long-term capital gains treatment and there being no spread between exercise price and fair market value at the time of 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.


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?


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.


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


those convert to NQOs after 90 days. It's coded into law.


Almost certainly a mistake. The only way I can imagine is if the company was pulling a fast one on employee taxes. If you’re a 1099 contractor, you pay your own taxes and are not eligible for ISOs.

Did you get W-2s with withholding at this place?


Yes. I wonder how this would have turned out differently if I'd had ISOs. I exercised them all and paid taxes on the difference between the strike price and the 409(a) valuation, treated as income, and the company did me a favor by arranging for me to sell a small number of shares to one of their investors at much higher than the 409(a) valuation to cover my tax bill (the agreed-upon price was close to, but not quite, what they were planning to raise their next round at). I thought this was a pretty classy way to solve the liquidity problem for an employee that owed taxes, and I would like to see something like this become standard.


Sounds like you got pretty much exactly what you would have in an IPO (presumably at a lower valuation of course) if you'd decided you were bullish on growth and didn't want to diversify.

The main thing you missed out on was the ability to 83(b) exercise. If you don't know, that is something you can do in the first 90 days following the stock grant, where you write a check to the company (usually some administrator the company designates) that exercises at the same value as what the grant was written at. That means you 1) don't have any capital gains to worry about, which with AMT can be a big deal, similar to NSO treatment and 2) start the long term capital gains clock, so you are potentially taxed at a lower rate than ordinary income.

Since it sounds like this startup went out of business (?) I think you were essentially treated as well as possible.


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


I misspoke in using the term exercise value. However (and you’re a lawyer so I’m going to believe you here) everything I’ve read or can make sense of says it is the value at time of grant that the cap applies to, not some fluctuating fair market value at time of vest. Is that correct?


Oops we are agreeing. Threading on the phone is rough. Anyway I updated the post to clarify cap calculations.


> the fair market value of the option at the time of grant, which by definition is the exercise price

Strike and option value are not the same thing. (Not sure which one this bill refers to.)


I just had to go double check this, because my statement above is based on actual experience.

> The $100,000 limit is calculated using the fair market value of the stock for which the options are exercisable, as of the grant date...

IOW — value at time of grant, not time of vest.


> Please do not comment on technical nuances of the tax code you do not understand.

cough. Sound advice, sound advice.


With the caveat that I know nothing about tax law, i feel like it's also terrible because it's procyclical for the employee. If you get taxed on vesting and it loses value when you exercise or liquidate you do get to take a capital gains loss, but you're likely to be doing that when you're jobless (due to business cycles and/or personal circumstances) so you're in a lower tax bracket anyways.


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.


> 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).


> 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.


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).


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.


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.


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?


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.


I suppose this only works if the IRS can be convinced that compensation value of vested options in an illiquid stock with very significant odds of perpetual $0 cashout also tend towards $0. A recipe for a very uncomfortable valuation talk...


The problem with giving employees shares is that they would either need to pay for those shares or be taxed on their value. This would effectively limit early stage startup participation to those with a nicely filled bank account.


I wonder if this could be solved by a contract saying a private investor will immediately buy back from you whatever percent shares are needed to cover your taxes.


> 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.

Is this true? I thought (perhaps incorrectly, naively) that one of the whole points of private equity being locked down and unable to sell/liquidate was just that - so that it can't be sold/liquidated. Any solution that makes it liquid goes against one of the original purposes, and thus isn't likely to happen.


> So we have to start paying people in actual shares if we want to give equity

This is also a big gamble if you're given shares in a non-public company. You pay taxes on these shares at vesting - not only have you reduced your liquidity until IPO/exit, but these shares could end up being worth nothing if the company fails.


That's true if the system continues to work as it does today, yes. But I think the entire model of venture finance is changing towards crypto anyway, making most of these specific points moot. Crypto assets will have different regulations in some form; so I think we should look to shape regulations around cryptocurrency rather than try to cling to an outdated funding model and its associated tax dodges.

Does anyone have data on the number/size of round A funding events vs ICO funding? I have a suspicion we're seeing a transfer from one into the other.


If this is any indication, traditional venture capital seems to be doing pretty well:

https://www.crunchbase.com/lists/recent-funding-rounds/f535c...

And those are mostly just rounds raised today.


Can I give back my options if this bill passes? I'm literally sick now reading this. What I thought was a great part of my compensation package is literally going to bankrupt my family.


Existing grants would be grandfathered in, so giving them back may not make much sense. Future grants, though, should just be killed and you should negotiate for higher pay.


Is the grandfathering section clear on that? It mentions deferred compensation, which I'm not sure was a comment on options specifically or something else.


> It mentions deferred compensation, which I'm not sure was a comment on options specifically or something else.

Deferred compensation plans are something else entirely; they're a way to say "hold back part of my salary and invest it in a 401k-like thing, and give it to me later". (Such plans are non-qualified and not backed by anything other than the credit of the company, unlike a 401k, so not something you want to do if you have any doubts in future solvency.)


When would the new law take effect?


Yes you can just give them back, but I would be shocked if the bill passed this way.

This clause wasn’t in the House version of the bill. Call your senator.


Why would you be shocked? There's all sorts of nasty things in these tax proposals for the less than wealthy. They are looking everywhere they can to find offsets to make the tax cuts for the donor class work under the budget rules.


If you're getting options and RSUs, you're going to be upper middle class at least, and thus wealthy by the definitions of most Americans.


Not by the definition of this bill, though, which is what matters.

The majority of HN readers are going to see a net increase in taxation, to fund giveaways to the GOP's donor class.


Does this bill define who's wealthy or not?

The bill gets rid of AMT, which many HN readers have been hit by, thus helping them. It also increases the standard deduction, which helps lower income people much more than higher income people.


When people talk about this package benefiting the wealthy, they mean very wealthy people. The upper-middle-class would probably take more damage from it than most.


It benefits the lower income groups significantly while giving a kickstart to job growth, at nearly the sole expense of the upper middle class.

I don't like the plan because I pay more under it, but the value of the giveaways to the very rich seem rather small compared to low income benefits. Lowering of the corporate income tax rate and axing the mortgage interest deduction has broad support from economists across the political spectrum too.

NPR had an interesting piece on this in 2012:

https://www.npr.org/sections/money/2012/07/19/157047211/six-...

Edit, great chart showing who pays more / less: https://www.marketwatch.com/story/here-are-the-winners-and-l...


"while giving a kickstart to job growth" that's less than supported by evidence right now also at current level of unemployment it doesn't seem like taxes have been the limiting factor.


Our labor force participation rate has continued to drop, giving us a shrinking tax base. The official unemployment stat includes underemployed and part time workers as well, and is not fully reflective of the health of our economy.

Good article from Pew Research on this: http://www.pewresearch.org/fact-tank/2017/03/07/employment-v...

"As many observers have pointed out, the official unemployment definition leaves out some significant groups. The underemployed – part-time workers who would prefer to work full-time – are counted among the employed. And discouraged workers – people who’d like a job but have stopped looking because they don’t believe any work is available – aren’t counted as part of the labor force at all."


The definitions of most Americans doesn't matter in this case. What's in the proposed congressional bills matters.


It was originally. It was removed last week.


This only affects RSUs and NSOs. I assume you have ISOs


While this is an unintended consequence, how do you otherwise tax the massive equity compensation packages offered to executives? It has to be across the board.


Honestly, this feels like an accounting trick to recognize taxes sooner. This helps the early year or years of the budget balance, at the determent of the later years, which usually don't count for budget scoring.

In this case, it also gives a fair number of people a bigger tax headache. In some cases, taxing earlier may mean future gains become capital gains when they may have been ordinary income; that's not good for tax revenue, even if you get some of it sooner.


It's already taxed whenever they exercise.


Well, perhaps increasing tax at exercise was politically untenable, but tax at vesting was. Just a hunch that they needed to grab from somewhere easy.


It is definitely easier to sell "oh this is just an esoteric part of the tax code that effects a small percentage of people. You know, we are just moving around when they pay taxes it's not like a tax increase or decrease".


How about taxing the options when they are actually sold, and gains are actually realized?


As income tax or capital gains tax? Because usually with income there should be some income tax somewhere.


I don't think it's an unintended consequence. I think it was meant to punish Big Tech for their resistance to the Republican party in the 2016 election.


That is another hunch that I was considering posting but personally I'm skeptical of this. While immigration reform may have fell on its face due to opposition from tech firms, I find it hard to believe the Trump administration would conceive such an effective means of targeting them.

It stands to reason that they recognized NSOs/ISOs being used heavily (perhaps more than anyone else) by tech firms but this just seems like a recognition that wealth taxation woefully needs reform. The estate tax is being retired so this seems to balance it out.


> The estate tax is being retired so this seems to balance it out.

So taxes on people that work for a living are raised to pay for eliminating the estate tax multi-millionaires?


I think the way to look at this is as yet another attempt by dying but deep-pocketed industries to buy themselves a few more years of oxygen whilst their executives either retire and GTFO or they desperately pivot to the scary new age of Tech and AI that is already upon us.

IMO it's not partisan, it's just business.

further, this already happened once with AMT and Dotcom 1.0, leaving a bunch of rank and files with huge tax bills for profits they never actually reaped.


no new money millionaires disrupting the status quo, please.


My thoughts exactly. There can't be any other reason for it.


I'm not even a tin foil hat kinda person, and I'm not nearly as paranoid as many about "the powers that be" - but I thought about it for almost an hour solid this morning and this is the only reasonable consolation I can come to. It's odd because it's actually massively stifling the economy to protect what killed the economy.


yeah, this is old guard trying to put up barriers against up-and-comers in tech, under the guise of sticking it to the elites (ironically).

equity compensation has plenty of risks, which is why the timing of taxes gets complicated. the value of the underlying asset needs to solidify enough (meaning there is a liquid enough market for the equities) that it can be (partially) liquidated and used to pay the tax. but the variance in the liquidity over time is so high that it's nearly impossible to properly predict when the tax man should come knocking on the door.


Yes, it would be like here in Australia, where I paid higher rate tax on non-public shares allocated to me. I didn't even have the luxury of waiting until they vest! I think if you leave a company before vesting you have to try and get that tax money back from the ATO.

In fact, you could, in theory, bankrupt someone by giving them enough shares.

I think they may have changed this for small enough companies, but still, it's a bad thing aimed at taxing middle classes not the rich. The rich don't earn shares as part of payroll, I imagine.


>The rich don't earn shares as part of payroll, I imagine.

In Australia or the US? Because they do in the US.


I mean not to be a jerk about it but so what? It seems like giving out high risk stock options is a bad deal for workers overall. If the goal is to grow the economy wouldn't paying a rank and file employee more fairly be better for more people and the economy as a whole?


I know many early stage employees that achieved significant financial upside by working at early stage startups. Working at an early stage startup is probably the only low-risk way of achieving that. Creating your own startup is of course always an option but requires significant upfront capital, a huge opportunity cost in terms of how much you work and a significant cut to your salary. (if anything).


>I know many early stage employees that achieved significant financial upside by working at early stage startups .Working at an early stage startup is probably the only low-risk way of achieving that.

I mean knowing "many" is different than that being the majority of the cases, and I would strongly dispute that working at a startup is a "low risk" way of achieving some huge financial upside. I in fact remember seeing on Hacker news a few months back (I'll see if I can find it) a study that basically stated that in the aggregate employee stock options at startups aren't worth the risk.


Agreed. Isn't the general advice to treat the options as worthless and always negotiate for more cash whenever possible? Then, in the rare case they are worth something it's a nice bonus, but not something that should ever be relied upon.


> low-risk way

Unless it goes bankrupt or has some other issue and you don't get paid or get fired.

I do not like this idea that startup employees aren't taking a risk. It encourages extremely one sided behavior.


> would make startups completely unable to compete with incumbents.

They already are mostly unable to compete with larger companies on total compensation. Startup equity is worthless unless you win the lottery.

https://danluu.com/startup-tradeoffs/


The Joel on Software post cited on your link is just too good.

https://www.joelonsoftware.com/2008/05/01/architecture-astro...

> Jeez, we’ve had that forever. When did the first sync web sites start coming out? 1999? There were a million versions. xdrive, mydrive, idrive, youdrive, wealldrive for ice cream. Nobody cared then and nobody cares now, because synchronizing files is just not a killer application. I’m sorry. It seems like it should be. But it’s not.


> 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. Most companies give their employees ISOs, which arent affected by this bill. So it would actually be 0 change to the employees. What this affects is the investors or potentially the founders of a startup


I don't know--maybe startups and small businesses will just have to go find a better way to be competitive compensation-wise. Today, they get to lure people in with an insufficient cash salary plus "free" equity lotto tickets, perpetuating the "jackpot or nothing" environment. I don't know what the solution is but it would be nice if a creative alternative could be found.


What if your goal is for technical talent to prefer companies that make parts for the F-35 that actually function as intended, instead of companies that could be described as "Uber for cat-sitters" or "the Snapchat of Etsy-linked Tumblr posts" or "Pets.com with more tulip bulbs" or "like Facebook, except fronting for GRU instead of NSA"?

In that case, it would meet that goal very well.

What a pity it is that the technical talent, who might prefer lucking into big piles of windfall cash by working for the right unicorn, has no big national organization to lobby in favor of our interests, and speak out against this type of change. (If you're one of the folks that knee-jerk downvotes any mention of tech worker unions, that's what I'm talking about, so let's get that click out of the way.)


In this instance the exchange you would have to make would be crippling startups and small businesses, which is where the vast majority of the growth of the economy happens.

As an aside, how many companies do you see actually building Snapchat for Etsy-linked tumblr posts? I see that criticism of Silicon Valley all the time, yet despite being in the heart of it I rarely see that kind of company. I’d guess an order of magnitude more money is going into building human transporting drones and supersonic jets than into the silly stuff people love to rail on the Valley for.

Look at the list of startups that just came out of YC and you’ll see maybe one or two companies that fit that kind of mockery.


We need to draw a distinction between "startups" and "small businesses." Options and RSUs, as a vehicle for engineering talent, is largely a VC/SV thing. I work on the east coast in a non-NYC city, and options/RSUs simply do not exist, even at what most people would consider tech/software companies, even the ones with venture investment. Certainly, Bill's Hardware down the street does not offer stock options.

By and large, taxation of options and RSU at any point will have negligible impact on the SMB sector of the US economy. It's probably very, very damaging for startups if your definition of startup matches Paul Graham's, but if your definition of startup is "new business that happens to use JavaScript for something" this is unlikely to change anything about your day to day competitiveness.


And that's why Silicon Valley is on its own for this one.

It hasn't loaned me its political power for anything that matters to me, and so for this issue that impacts me not at all, I will not be returning any favors.

The collapse of the 2002 bubble hurt everywhere else far more deeply than SV, with a more painful recovery, so I see anything that might curb irrationally exuberant investment in companies that are not likely to ever benefit rust belt economies as a good thing.

Furthermore, I am more in favor of simpler employee incentives that do not force people to invest where they work. At the income level of a typical tech employee outside of SV and NYC, any investments should likely be buy-and-ignore in a robot-managed index fund. I don't want all my net worth to be tied up in my employer, especially when we have no contract, no real control over its business strategy or tactics, and I can be fired at will. If you want to pay me $X, pay me $X.


That's just it. Where I am, I don't see new companies building anything. YC isn't here. I'd love to work for a startup with a like-brand-X-but-for-Y or a word-salad elevator pitch, that also offered a compensation package as good as any found in Silicon Valley.

But I don't get options or RSUs, or even cash bonuses. I get billed to a customer at $200-$400/hr and get maybe $50-$60 of that in total compensation. It's hard to tell, really, because my employers keep getting sold to other companies that proceed to change around the benefits plan. The details aren't very important. Those companies are getting a whole lot of money, and they are giving a smaller proportion of it to the leaf node workers, and a larger share to administration, management, business lubricators, and bureaucracy. The tech industry has very little political-economic clout outside of the handful of cities considered to be tech centers.

I'd love to have an alternative to that, beyond moving my family at least 500 miles away. Again. But that SV money is mostly staying in SV. It isn't going into helping out the industry in the rest of the country, or the rest of the world. It isn't spreading business opportunities to local economies outside of central California and the Pacific NW. SV has done little for me beyond offering me new things to buy. They have not given me the additional local economic activity that I'd need to buy them.

(That's not strictly true. SV has also exported business practices that get cargo-culted everywhere, usually to my detriment.)

I have zero reasons to support the small businesses of Silicon Valley. They can go piss up a tree, because even in a hurricane-force gale blowing directly east, it still won't land anywhere near me. I also won't ever be in a position where I'd actually be able to move there, and it seems the culture has an unnatural aversion to spreading itself somewhere else. So choke on it. SV is competitive with my local tech community, rather than cooperative, so crippling its startups and small businesses helps ours, even at the expense of a smaller overall tech economy. I'm fine with a smaller overall pie, if I get a bigger slice on my plate. I'd only care about bigger pie if there are bigger slices for everyone, not just the ones closest to the ovens.

So by all means, make options and RSUs untenable, and dry up the H1Bs, and let the major players collude with anti-poaching agreements, and let the NIMBYs drive up housing prices. I want Silicon Valley to fail, because in its success, it has been leaving me behind. It will take my money, but won't give it back by spending it in somewhere in my neighborhood. If the only way to claw that back is to vote it out of someone else pocket, so be it.

Edit: Besides that, it's a bit ironic that those working on defense systems like THAAD and Aegis and C-RAM and Iron Dome are largely out of range of North Korean missiles, while the NK propaganda videos depict the atomic destruction of San Francisco and all of its peacetime-tech startups. Pork barrel military-industrial spending might be wasteful, but it does spread the wealth to a lot of people who are otherwise completely ignored by the investment sector.


>SV is competitive with my local tech community, rather than cooperative, so crippling its startups and small businesses helps ours, even at the expense of a smaller overall tech economy. I'm fine with a smaller overall pie, if I get a bigger slice on my plate.

Bang on. I'm mostly glad that my particular corner of the Midwest doesn't seem terribly keen on aping the SV model of shitty business practices, at least. Small victories and all that.


> I'd love to work for a startup with a like-brand-X-but-for-Y or a word-salad elevator pitch

Why? I'd much rather actually deliver something to the client, even if...

> I get billed to a customer at $200-$400/hr and get maybe $50-$60 of that in total compensation.

Then it sounds like everything else around what you deliver is worth at least $140-350/hr. If it's really so easy I'm sure you could offer your services for $100/hr, take a nice big raise and save your clients hundreds of thousands a year.

> it seems the culture has an unnatural aversion to spreading itself somewhere else

Because even for a culture that bitches and moans about how old school business ways are out dated, they still insist you be within a 2 hour drive of your investors, so that when Ashton Kutcher gets mad at someone he can yell at them in person instead of over ~~email~~ ~~hipchat~~ Slack.

> It will take my money, but won't give it back by spending it in somewhere in my neighborhood.

Stop buying shit from startups


"Then it sounds like everything else around what you deliver is worth at least $140-350/hr. If it's really so easy I'm sure you could offer your services for $100/hr, take a nice big raise and save your clients hundreds of thousands a year."

Not everyone wants to, or is able to strike it out on their own.


Exactly. If I ran a lemonade stand, it could be the best lemonade within 100 miles, but it would also be bankrupt within an hour.

I would need a non-technical co-founder that I could trust to not stab me in the back, and an investor willing to give us enough runway to take off without putting any land mines in it. So far, those conditions have never been met. Business around here is very often more about who you know than what you can do, and since I don't know the right people, those customers are simply unavailable, even at a deep discount to $100/hr.

All that overhead is necessary to navigate the system that has been set up to favor those that support the system. The bureaucratic hoops are insurmountable barriers to entry to individuals, and very steep even for a hypothetical small company that is 51% owned by a disabled Indian veteran woman. It wouldn't be much of a military-industrial complex if it could be disrupted that easily. The "clients" are far less interested in saving money than with preserving their influence over the nature of the work, an end often pursued by spending every penny of the allocated budget, regardless of need.

A union could change it. A U.S. attorney with a forensic accountant, TS/SCI security clearance, and a stack of subpoenas could change it. A political party could change it. A handful of generals and admirals could change it. One software pro, working alone? Not so much.

This is really the best deal I can get right now, without dropping everything and moving again. It isn't great, but it is available to me, and I don't have to front capital, work owner-manager hours, or do types of work that I am not comparatively good at doing.

Besides that, I have already failed at going it alone once, and once was all I could afford. I didn't make it, and lost everything. The work was good enough, but not enough people wanted to buy it, and not enough customers recommended it to their friends. So that runway is gone, and I'm stuck workin' for The Man until I can retire. In retrospect, I would have been far better off not trying. But that's all anecdotal. You might succeed on your own. Maybe I just didn't work hard enough.


I don't understand most of this post, but claiming you can't strike it on your own because of bureaucracy is baloney. I've done it, have friends who have done it, and it's not that hard. Put together an LLC for a few hundred bucks, reach out via your network for clients (Or conversely, start building a network), read up on sales and business administration, and just do it.

You don't need to "front capital", or work special hours, or have a special clearance, jesus. Just don't live paycheck to paycheck and stash away a few months expenses while you do your thing. Thousands of professionals do this on a regular basis. IMHO employment is much more risky and cutthroat. You don't get to set your salary, end up with disadvantaged tax treatment, and half of your coworkers are focused on crawling up an artificial ladder instead of actually completing work on time.


I cannot do the work I am currently doing--the work that people are willing to pay $400/hr to a contractor business for--as an individual without clearance. The other work available locally, subtracting those opportunities, pays less on average than I am now making as an employee. I don't want to move again without some sure way of paying those moving expenses. Taking remote jobs puts me in competition with both India and Indiana.

The math works out. I, specifically, am better off as an employee. I already took my shot at self-employment and blew it. I won't get another. I'm lucky that I even got one.

If I still lived in an area with more potential customers, with more money, the story might be different. If I wasn't absolutely crap at sales and administration, the story might be different. If I were better able to build a network, such by being more attractive or having better social skills, the story might be different. If I weren't still paying off debts from the first time around, the story might be different. But it's not.

I'm not blaming bureaucracy. It's me. I cannot run my own business. I tried it once already, in the Chicago market, which should be plenty big enough for anyone with an iota of business ability, and it didn't work out. It was a dismal failure. Nobody wanted to hire me. Nobody wanted to refer me. I couldn't get the customers. Therefore, I must have zero business ability--not an iota; zero. If a bunch of money magically dropped into my lap to start a business, I would still have to hire someone else to get me customers. But without already having a customer, I could not afford to hire that person. Easier all around to just find a person that does that already and be their employee.

Do you understand this? Can you fathom how a person might have one valuable skill and be completely unable to exploit it alone? What would you say the difference would be between an aircraft designer that worked as an employee for Boeing or Airbus and one that sold mail-order kits to hobbyist pilots? The former has a whole bunch of people multiplying the value of their labor, and probably gets a smaller share of the gross revenue. The latter might get 75% of their sales, and still make less total.

Besides that, people don't like me. You may underestimate how important that is in the realm of economics. People prefer to give money to other people that they know and like, rather than the people they don't. I know there are loads of resources out there on how to get other people to like you, but it seems like they all rely on some secret sauce that I just don't have.


You don't like what some of the startups in the current age are focusing on, so you want disincentivize all startups in general, for perpetuity? That's an incredibly extreme response.

Throwing the baby out with the bathwater, if I've ever seen it.


More like throwing out someone else's ugly ogre baby with the mud wallow.

I most definitely want to disincentivize startups that lure people that likely don't yet know any better to move to one of the highest cost-of-living markets in the world, to work long hours in exchange for empty promises and unicorn-lottery tickets. If you actually need top talent, you can pay for it with cash. If you can't get enough cash to pay for it, that might be because investors don't believe you can do what you say you can do, and they might be right.

There are plenty of startups that don't resort to flimflammery to attract employees, and many of them are forced to bootstrap on slim margins and angels because their model will never make them a unicorn, and certain types of investor are only attracted to the high-risk, high-reward ventures. That may be because the rules around the current system provide additional incentives to have that preference. Changing the rules might change the preference.

It is my personal preference that businesses that quietly fill a niche and make money from day 1 be preferred over those that burn their solid rocket booster at both ends, only to make big flashy explosions that do nothing and go nowhere. But I lack the funds and the risk tolerance to enforce my preference, so it doesn't really matter to the markets at all. But I still have one vote worth of political power, whenever that actually matters.


It sounds more like startups have not given them a reason to care about their fate.


At the same time, wouldn't that talent be equally wasted at "Uber for cat-sitters"?


I agree, it's a bad comparison.

What's more happening is that talent is being attracted to mid-stage startups, unicorns, and the big companies like Google and Amazon. Early-stage startups like "Tinder for people with green hair" don't employ enough people across the market for them to significantly impact it.

I don't think this is about government fighting against stock-paying companies for tech workers by fucking up RSUs. In reality it's probably just government incompetence. No need for strawmanning or conspiracy


At the same time, most early stage startups aren't actually doing much that requires such high levels of talent and specialization. They really just require good amounts of "get shit done". And there are plenty of people in this country that have adequate levels of that. They're just mostly not in SV.


I guess they'll have to pivot or be disrupted.


Equity is imaginary fugazi. you might as well be accepting empty promises. I wouldn't want it even now


Yeah so imagine having to pay taxes on something you think is "imaginary fugazi."


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?


That’s the point of options though - most of the time that “cash” doesn’t exist to be paid out in bonuses. Options are a bet that it will exist in the future.

Why do startups pay lower salaries than Facebook? Because Facebook throws around $200-300k salaries and doesn’t care. Startups can’t do that, so it promises a piece of the pie if the company becomes big and successful instead.


At this point, unless you're C-suite, most startups are a really bad bet compared to the BigCos paying out anywhere from $250K-$1M annually depending on your skill set and experience.

What's happening now IMO is that the hot talent has figured this out and they have accepted positions at Tesla, Salesforce, Google, Facebook, Apple, or Amazon. That said, I know someone who walked away from a $10M package over 4 years to be the CTO of his startup. I wouldn't have, but everyone has to follow their path, right?


> 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.

I agree that if you can get into one of the established companies in the top quintile of the industry you are probably better off than if you joined a startup. I'd hazard a guess, though, that the startup jibs are easier to obtain and more plentiful than those BigCo jobs.


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.


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).


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


> What's happening now IMO is that the hot talent has figured this out...

It sounds like Tesla et al. have figured out the market clearing rate for great engineers. Why haven't the other companies also figured this out? There are plenty of other companies with big budgets. And early stage startups could certainly offer bigger percentages in equity (or at least better terms on the equity they offer).


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

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

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


On the other hand, even $1M/year doesn't look good compared to what you would have made via options/RSUs if you were employee < 10 at Facebook/Google/Amazon...


Getting a few downvotes for this comment but my point is I think it's too simplistic to frame it as options are junk, it's a rigged lotto for naive young guns yada yada. Sure, the stats aren't great but if you're young, talented, looking for a thrill and aware how the game is stacked, I don't think options/RSUs are bad 100% of the time.

Personally, I'd like that road to always exist and make the choice myself rather than having it disappear from the tech scene completely. I personally know more people that have done well out of startup stock grants than I do earning >$500K in tech.

A lot of the US's problems with share options could be solved with saner tax. It seems bonkers to me that you are taxed when you exercise rather than when you sell.


It's not that options are worthless, they're great in fact. It's that the C-suite and the investors usually divvy up the pie amongst themselves and give the rank and file the crumbs that stuck to the pie pan. But let's do the math. The average startup exit is ~$243M, let's call it $250M for say 4 years of work.

https://www.inc.com/issie-lapowsky/average-successful-startu...

Let's say you get paid $150K salary for those 4 years of work at the startup vs $300K at BigCo. To break even, you need to close a $600K deficit, that means you need at least 0.25% just to break even with a guaranteed ROI.

Now let's say you're experienced and you're getting $500K at BigCo, now you need ~0.6% just to break even.

Finally, now you're a domain expert and you're getting $1M at BigCo, now you need ~1.4% just to break even.

In my case, I would need at least 2x the listed equity in each of these scenarios to choose the startup over BigCo. I have never been offered numbers like that. I have had CEOs and CTOs get indignant with me over my math though. Math is hard I guess.

However, if you crave autonomy and freedom, I think the message is clear here: be the C-suite at your own startup, even if you have to bootstrap from a place with a lower cost of living. Lifestyle income is a lot easier than building a $250M+ company IMO.


The other problem is cryptocurrencies have created a ton of new companies that are paying big for talent. I actually think this is a good thing. Too many people were working on dumb startups back then. I want more engineers at Tesla.


Are they paying in cash, or in their cryptocurrency?


They're paying cash. I've seen as much as $500 USD / hour.


ICO tokens obv


Nor does the ability to "buy in" exist for normal employees unless the business is public or sets up some kind of ESOP.


Yeah, but all the risk of that bet is put on the employee. The employer faces none of it.


I don't think this is true anymore. I think this is one of those funny vestigial things that evolved in a different era.

If you think of a startup as a true "garage venture" with a few people toiling away trying to ship a product, maybe that's the right model.

That isn't really the model for SV entrepreneurship anymore, though, even though we kinda pretend it is. How it works today is, $8 million-dollar "seed" rounds, downtown office space, early-stage companies paying $150k or more for talent, incubators and signaling, etc.

Maybe one of those cases where the game has changed, but our mythos hasn't.


That’s simply incorrect. I founded a company that raised a mammoth seed round in Silicon Valley (not $8m but more than $3m), and we do pay some high salaries, but Apple and Facebook still pay salaries that are much, much higher.

Critical employees have joined us while taking $100,000/yr pay cuts, despite. Having a salary in the six figures.

To think that startups can play that game of “equity doesn’t matter” is just wrong, even in an era of $8m seed rounds. I know HN likes to say “go for cash not stock,” which is a good way to negotiate if you want to avoid downside risk, but if you eliminate stock compensation there’s no way startups can play ball with incumbents. Full stop.


I don't think so. Why should employees make up such a large percentage of the money invested in the company? When you take a salary cut of 50K, it's like taking that money an investing it right then and there. Why should an employee be investing 50K of their own money into the company every single year? It's bad enough that someone would invest 50K in a single company: one that picked them, not the other way around, with all the information asymmetries that applies, but to add insult to injury: the risk is compounded by the fact that their investing all this money into the very same company they depend on for their paycheck.

VCs are much much better equipped to do investing: both in terms of skill sets, experience and information. Employees should not be forced to become angel investors just because they work at a start up.

VCs will always have enough money to invest in truely excellent opportunities. It just means, they'll need to invest more. And in this low interest rate world, I don't think the world is starving for cash is it?


Maybe an employee believes in the company and wants to take part, deeming the risk is worth it for them? Clearly that's what's happening.

It's certainly rational in some cases to take the risk of owning a portion of a company instead of taking the same amount of cash and putting it in the S&P 500. You're always investing your time and money, it's just a matter of where.

And for what it's worth, if you're getting paid $250k at Apple, you can probably go back at almost any time.


"Maybe an employee believes in the company and wants to take part, deeming the risk is worth it for them? Clearly that's what's happening."

And that belief is abused, and the employees get fucked over when it comes time for an acquisition, as their shares get dilluted to hell and back.


Yes, that often happens and it's clearly unethical. What's your point?


His point is, that you have to assume that will happen quite often. We're simply not equipped to forsee all the legal and financial risks of having stock options. We've seen too many ways that employees have been taken advantage of. You can't simply "trust" that if the company does well, you'll do well.


Sure, but who said we should simply "trust" that?


That's the implicit suggestion behind the entire options thing. Especially given that almost no individual developer has a bargaining position strong enough to demand the safeguards that would avoid those problems.


Look, people still gets big payouts, even if many get stiffed. One can still rationally take the leap even knowing that the game is rigged.


> it's like taking that money an investing it right then and there.

I disagree. This is only the case if the options are $50k in cash, or $50k in equity. With startups, the options are $0k in cash or $50k in equity. Startups can wish equity into existence, but they can't magically produce cash.


> Why should an employee be investing 50K of their own money into the company every single year? It's bad enough that someone would invest 50K in a single company: one that picked them

Recruiting and hiring, after new grad level, is a two way street. You have the choice to accept, deny or negotiate an offer.


So why are you going after these guys that need to take such big pay cuts? I can almost guarantee you that there are plenty of people with a high enough level of talent that are in other areas.


Find them for me, and I'll hire them and pay you a referral bonus.


Go outside the Valley.


We hire remotely. It's not the instant solution to all problems, despite what HN would have you believe. A lot of experience is still concentrated and SV and highly-compensated.


> “go for cash not stock,” which is a good way to negotiate if you want to avoid downside risk

I think significant amount of people would be fine with "just risk". They are not fine with risk plus malicious business practices - diluting stocks, delaying IPO indefinitely, creating different tiers of stocks with multipliers, preferential stocks for non-employees, etc.


Silicon Valley isn't the world. I think the reality is that a startup is often the "garage venture" or somewhere well below a well-funded startup. Most startups of the world don't have multi-million dollar seed funding, even many that do aren't paying 150k plus salaries.


Maybe this is true in SV. My experience in other areas of the country is that startups, especially early stage ones, don't have that kind of cash.


The main problem i see with the equity system is that its absolutely intransparent in terms of cap tables and preferred shares.

To the very least, if companies were forced to give out cap tables, or at least, a calculator that gives you your payout based on the company sell out cases, you would be able to measure it.

Right now, the calculation is complicated and obsfucated for employees. Lets say you have 1% of stock and the company sells at 100m. You are most likely not going to get 1m because of preferred shares. Preferred shares are truly a cancer on the system.


It seems completely absurd to me that preferred shares exist, and one of the reasons I always hesitate whenever I'm offered equity.

For anyone curious, here's a good explaination: https://www.capshare.com/blog/how-preferred-stock-affects-th...

They basically shift a lot of downside risk from the preferred share owners (usually a VC firm I guess) to the founders and employees in the startup, which in theory makes them more likely to invest in more startups. But in the long term, this seems like it consolidates captial (which is generally a bad thing IMO).

It seems as though it just makes investing in any startup that's expected to at least be acquired at some point a 'risk-free' investment.

Anyone have any thoughts on why this might be a good thing?


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

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

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


> They basically shift a lot of downside risk from the preferred share owners (usually a VC firm I guess) to the founders and employees in the startup, which in theory makes them more likely to invest in more startups. But in the long term, this seems like it consolidates captial (which is generally a bad thing IMO).

I'm torn on this. I agree that, in general, capital consolidation isn't a good thing. But you have to consolidate somewhat. If a startup founder has to deal with 100 separate investors to put together enough cash for an A round, that's a huge problem. Consolidation of some amount of capital into VCs helps with that.

The VCs, when it comes to money, are also taking on much more risk than the option-granted employees are taking on. As a sibling poster mentioned, though, you really need to make a distinction between participating and non-participating preferred stock. The former is super bad for founders and employees, but these days it seems like the latter is the norm, except for perhaps in medical/biotech startups. It gives the VC a better chance of recouping their initial investment in the case that the company sells for an unfavorable amount. If the company is successful, they'll almost certainly convert their shares to common and take no more of the pie than they're entitled to.


I made another comment about them below, but i will repeat in a different way.

People have their own assessment of what is valuable, and getting exactly what they want means they are willing to part with as much utility. A person that loves sandwiches with blue cheese is willing to pay more for that cheese than he would with the a regular sandwich.

The existence of blue cheese sandwiches is moderately irrelevant to the existence of regular sandwiches. And banning them would only increase the price of regular sandwiches and also make those people less happy. Less sandwiches would be sold.

Preferred shares don't really hit common shares. If you knew exactly how it went, then you would make an assessment of the value of the shares as they are. Your internal valuation of sandwiches will adjust to the existence of blue cheese sandwiches.

The reason why they feel unfair, and they are unfair in this sense, is that the guys with preferred shares know what they are getting, and you dont. And also, as an employee you dont get to buy preferred shares. If you dont know the price of blue cheese sandwiches and you can't buy them, you will find them unfair. Banning sandwiches is not the solution to the problem.


I'm not so sure about the analogy, but I get your point.

I think you're right that transparency is a big problem here. As long as others have perfect knowledge of the situation, they can factor the extra risk into their negotiations (e.g. Ask for more equity, because common shares are worth less if there are others with preferred shares).

The terminology surrounding this is quite misleading too - as you mentioned in the grandparent, having 1% of a company sold for 1M, doesn't mean you'll get 10k, which is pretty weird. Not sure what the solution is though - maybe it's just for everyone to be aware of how preferred stock works and make the cap table public.

It would also be nice if there were a standardised way for a company to say "We won't offer preferred stock for at least X years". Something like that would make me much more confident in taking equity in a company. Which, in principle, is actually what I want to do - but all these kinds of tricks essentially mean I can't (because I can't properly estimate the value of what I'm offered). Public cap tables would help, but wouldn't protect against future investment rounds with preferred shares.


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

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

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

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

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


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

What do you mean? Of course this is public knowledge. Anyone accepting an equity grant as an employee who doesn't know this isn't doing their due diligence.

Asking about the cap table of a small startup while interviewing is an entirely reasonable thing to do, and I've immediately discounted an interview at a company where they've been cagey about giving me details. I mean, I'm fine with them not breaking it down into what percentage each investor owns, but telling a prospective employee how much of the company in total is owned by VCs vs. founders vs. employees/option pool is pretty uncontroversial.

> If you as an employee were able to buy and sell the shares with liberty, companies would almost immediately make cap tables public to get cheaper funding from the general public.

This doesn't really make sense. You've just described a publicly-traded company, and obviously an early-stage startup can't afford to be one of those.


> What do you mean? Of course this is public knowledge. Anyone accepting an equity grant as an employee who doesn't know this isn't doing their due diligence.

Really. Can you tell me what were the employee gains of facebook, google and twitter on stock divided by the market compensation at the time that the engineers got? Where the engineers back then at every single founding round making a proper decision based on the information they had?

Please.

> Asking about the cap table of a small startup while interviewing is an entirely reasonable thing to do, and I've immediately discounted an interview at a company where they've been cagey about giving me details. I mean, I'm fine with them not breaking it down into what percentage each investor owns, but telling a prospective employee how much of the company in total is owned by VCs vs. founders vs. employees/option pool is pretty uncontroversial.

Its not always available on the decision for the employee. The cost of acquiring that information is orders of magnitude different from the employee than the founders/investors. Its still asymmetry of information, even if it is provided, which it isn't always. In any case, if thats what you believe, then you would have no concerns of making it public, since it already is.

> This doesn't really make sense. You've just described a publicly-traded company, and obviously an early-stage startup can't afford to be one of those.

Why cant it afford to be "one of those"?


> Really. Can you tell me what were the employee gains of facebook, google and twitter on stock divided by the market compensation at the time that the engineers got? Where the engineers back then at every single founding round making a proper decision based on the information they had?

Of course I can't, but a) why would _I_ personally be able to, about companies I've never been financially tied to?, b) that's not really the point. It's exceedingly rare that anyone outside of an institutional investor, founder, or non-founding C-suite exec will get 10% (or even close to that) of the proceeds at IPO or acquisition time. If that's not common knowledge to anyone who has either worked at a startup and/or has done a minimum amount of reading about startup equity grants, then I guess I don't know what common is.

> Please.

Mind keeping it civil? That kind of dismissiveness is rude and uncalled-for.

> Its not always available on the decision for the employee. The cost of acquiring that information is orders of magnitude different from the employee than the founders/investors. Its still asymmetry of information, even if it is provided, which it isn't always. In any case, if thats what you believe, then you would have no concerns of making it public, since it already is.

I'm not saying anyone makes it public. Asking questions like these is pretty basic advice when receiving an equity grant, and companies that I actually respect give a reasonable answer. No, they're not going to open their books to you, but they'll give you enough information to at least be useful.

> Why cant it afford to be "one of those"?

The cost to IPO (assuming the unlikely event you can find a reputable bank to underwrite) would easily eat up any funding you've gotten in the beginning, and then some.


> Mind keeping it civil? That kind of dismissiveness is rude and uncalled-for.

It's a ludicrous position to say that because the rules of hidden information are known, there would be no effects in the information where to be known. I can't fathom making the argument that because there is potential access to information, its the same as the information being public being done in good faith.

> I'm not saying anyone makes it public. Asking questions like these is pretty basic advice when receiving an equity grant, and companies that I actually respect give a reasonable answer. No, they're not going to open their books to you, but they'll give you enough information to at least be useful.

If its useful to collect it and for the investor to know it, it's useful for the employee to have access to it, and it is also useful for the employee for the general public to have access to it. An employee is woefully unprepared to make an analysis in comparison to investors, even if the company disclosed 100% to their employees, there would still be asymmetry of information.

There is no extra effort for the startup. Just disclosure.

> The cost to IPO (assuming the unlikely event you can find a reputable bank to underwrite) would easily eat up any funding you've gotten in the beginning, and then some.

The cost of an IPO is made up. If there is anything showing that clearly, is the craze for ICO's.


Or like in the uk for approved (ie tax friendly) enforce the issuing of the same shares to employees as the others.


I'm not sure that is better. Extra provisions on capital might be adding more capital to the mix, which increase wages all around. It might be shooting yourself in the foot.

But hiding the information is a way for investors to have more leverage over employees. That is an undoubtedly unfair surplus to them.

Its not the only thing I'd change. I would do away with the restriccions of investing in startups as well. That would allow employees to buy stock whenever they want to (and the company is willing to sell them for) without this obscure negotiation. The minimum limits on investing in startups is a way to give higher returns to investors, while harming founders and employees.


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


I think that effect is somewhat overrated. In the end, its best to let people get what they want. In that sense, not having information doesnt let people choose what they want.

Limiting what can be offered is more likely to prevent people from being able to get what they want.

Its possible that investors are very risk averse and so, are willing to pay a big premium for the preferred shares, one that employees are not willing to pay. In that case, employees actually win out on the deal, as they might not be as risk averse (as its only a small part of the compensation).

But in that game, the employee is barred from buying unlimitedly (min 1mm in assets) and also from knowing what everyone else is getting (which investors know).

I cant emphasize how big a loss it is to not let employees invest. Employees know a lot of things investors don't and share that information amongst each other, but can't give market signals because they cant buy or sell or disclose freely. I.E. if you saw a company where employees are all buying shares now, its great for both employees and the general public AND investing in general.

Not only that, but not being able to sell and exchange shares between employees means you cant hedge bets as employee. For example, you could pool a bunch of startup shares that way. Thats only for investor groups today.

Sometimes when I think the US is supposed to be the pinnacle of economic liberalism, I shed a few tears.


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


>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.

Most option/stock agreements give the company right of refusal and they can block sales

>They don't grant stock, they simply pay cash (bonuses) and if employees want to buy in, it's their money

Doesnt work for private companies, there's no market to buy them in

> Maybe the solution is for companies to become public earlier and have investors operate

I've recently been thinking about the ramifications of more and more of our economy being privately traded. It means that many groups of people are unable to use that slice of the economy to back things like retirement funds. Also can technically lead to a run on equity where folks are trying to save but are just competing over the same limited pool of assets. Articles like [1] are indicating that the number of IPOs per year are dwindling. Maybe a law that says companies valued over $THRESHOLD must be public?

[1]: http://fortune.com/2017/01/20/public-companies-ipo-financial...


>> They don't grant stock, they simply pay cash (bonuses) and if employees want to buy in, it's their money

> Doesnt work for private companies, there's no market to buy them in

Personally I'd like to see more employee profit-sharing arrangements. Difficult for a lot of companies though that run at a loss for years.


Link to Buffett's proposal?


It's from the 2016 earnings letter. He was making a completely different argument, namely, that accounting that ignores options expense is bullshit (many companies still present this separately in their earnings reports).

The relevant section is as follows: "To say “stock-based compensation” is not an expense is even more cavalier. CEOs who go down that road are, in effect, saying to shareholders, “If you pay me a bundle in options or restricted stock, don’t worry about its effect on earnings. I’ll ‘adjust’ it away.” To explore this maneuver further, join me for a moment in a visit to a make-believe accounting laboratory whose sole mission is to juice Berkshire’s reported earnings. Imaginative technicians await us, eager to show their stuff.

Listen carefully while I tell these enablers that stock-based compensation usually comprises at least 20% of total compensation for the top three or four executives at most large companies. Pay attention, too, as I explain that Berkshire has several hundred such executives at its subsidiaries and pays them similar amounts, but uses only cash to do so. I further confess that, lacking imagination, I have counted all of these payments to Berkshire’s executives as an expense. My accounting minions suppress a giggle and immediately point out that 20% of what is paid these Berkshire managers is tantamount to “cash paid in lieu of stock-based compensation” and is therefore not a “true” expense. So – presto! – Berkshire, too, can have “adjusted” earnings."

Full pdf: http://www.berkshirehathaway.com/letters/2016ltr.pdf

I guess the difference is that big scaled companies have revenues, and cash, whereas small companies don't. But I don't think that's so true anymore in a time when companies are doing nine-figure investment rounds. I'm not saying it's typical, but I do think this model of "bundled options+cash" has got to go.


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...

> 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.


> 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!


This is the perfect solution if they really want to tax illiquid assets.


This suggestion might actually force some of the startups that play dubious games with stock values (not disclosing total # of shares issued and current values) and preferred shares and the like to be more above board. In a way getting taxed on these things would at least make it clear what their 'value' is.


But who would manage this federal portfolio?


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.


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.


Ah, the "beauty" of the US Federal tax system is that the answer is the same as everything else in the system: You. With You being liable for back interest and penalties if You screw it up. Basically the result would be an earmarking system, payable on exercise again, as opposed to time of receiving option.

That said, in the broad scheme of things it still seems workable. Startups may have to get used to also providing assistance with taxes for their initial employees. Honestly that's already not a bad idea even in the current environment.


The US is an anomaly among developed countries for having a tax system that is so heavily individualistic. Plenty of other countries give tax-preparation duties to companies or the government, so individuals are mostly covered by blanket forms. The US doesn't do this because H&R Block and TurboTax would get put out of business.

So there's no real reason that we couldn't have a more elegant and streamlined process, but you're right, we won't.


It's not like there's no precedent for this sort of thing. The Alaska Permanent Fund[0] is a fine example of a portfolio managed by a state-owned corporation that pays out to residents.

[0] https://en.wikipedia.org/wiki/Alaska_Permanent_Fund


Smart!


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

We offer stock grants (basically RSUs without a formal vesting schedule) to key employees at my firm and have had no issues. You say that there are issues with the vested stock not being liquid, but the issuing employer can simply offer to buy the shares back if needed at fair value if liquidity is needed, which we determine according to a formula which inputs the firm's balance sheet and trailing profitability.

This has the advantage of being very straight forward, both to the owners as the issuing party, and the employees -- but has the cost of being disadvantaged by the tax code.

Contemporary startup options packages are anything but that. Most of the time neither the employee receiving them nor the HR person explaining them has any idea how they really work -- but for all that opacity, they get a preferential tax treatment.

It's probably worth pointing out that the only reason startups rely so heavily on option compensation as opposed to simple equity grants are for the reasons above: they are tax advantaged, and the employees have no idea what they're getting. I wouldn't mind seeing the startup world return to a more easy to understand scheme.


isn't this already a problem for RSU's, where you get taxed at vest time (or on the value at vest time)? Are there startups out there granting illiquid RSU's? seems like a bad fit.


RSUs are taxed when vested and released. Vested but not released RSUs are not [yet] taxed.

Most companies issuing RSUs are doing so because there is a public market for them and so the release and vest date is the same.


"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.


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.


[deleted]


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.


    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

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


You are looking for something like a Rabbi trust.


It really isn't "made up." Issuing equity compensation triggers all sorts of activity. The notion of vesting is that the individual will come to own shares after the conditions are met sufficient to lift the restrictions. The restrictions often include time in service to company ("after 1 year of service, you will earn 100 shares"), performance toward some specific goal ("prototype passed QA by Q3"), and financial performance of the company ("EPS increased by 2%").

In these arrangements, the recipient is agreeing in advance to accept equity as compensation. The company must account for that essentially as if it were cash, and it becomes an income statement item just like any other compensation expense.

The economic event, for both the issuer and the recipient, is the moment when there is no material risk of forfeiture. In simple terms: if the company can't take them away from you, they are yours.


If the company can’t take them away from you but you’re contractually obligated not to sell for 18+ months, they aren’t really yours.


That's just twisting words. The time restriction has not been lifted. There are plenty of ways to handle that in the form of instruments like cash-settled SARs.


Maybe. But keep in mind the IRS isn't stupid, and they aren't simply passively taking the letter of the law. They are very much an active participant. For example, they may interpret option vesting in a different way then you just did, and they may prohibit blatant ways of getting around it.


Why would someone from a large publicly traded company panic? Shares already are taxed upon vest there.


Yep. That isn't about publicly traded companies. The only people that would panic is if you are in a startup that cannot exercise.


Yeah, mostly applies to pre-IPO companies offering stock options/RSU's.


Large publicly-traded companies can also offer RSUs---doesn't this still apply in that scenario?


In practice, RSUs already work that way: you're taxed on RSU delivery, which in the case of a public company is almost always the same as the vest date. Usually the company will sell a portion of the RSUs vested to do tax withholding on the spot, and then you're immediately free to hold or sell the remainder.

I the case of a private company, RSU vesting/delivery means you owe taxes but (usually) can't sell them to pay for it, which is (also) no different from today.


I'm under the belief that vest for tax purposes isn't until the share becomes liquid. If the startup can't exercise then, for tax purposes, has the share vested? I believe it has not (and have, in the past, filed taxes on this belief, with the support of my accountant.)


You're describing how things are now and have missed the point - this bill will mean that you will have to pay tax on vesting.


Am I? I thought I was providing supporting evidence for the adjustment of when "vest" actually occurs.


That's not supporting evidence; your believe is incorrect. Vesting is unrelated to liquidity and can occur without the ability to sell shares.


I would also add a clause where if you meet the timeframe to vest, you can exercise that within a certain time of leaving the company irregardless of the reason for leaving (IE: termination for cause etc.) to ensure that employees get what they earned.


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.


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)


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.


What is your reference on NQSO taxation at vesting under the current rules? AFAIK they are today taxed at exercise; ISOs, in contrast, are not necessarily taxed at exercise, but may trigger AMT.


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.


> 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.


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).


> 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.


It’s worth noting that there are companies who will front you the cash to buy your options and cover tax, in return for a cut of the proceeds. People in this situation have options.


I read about these only in response to the situation a lot of engineers were in at Uber -- was this a thing prior?


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.


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/

Or this comment:

https://news.ycombinator.com/item?id=11290662


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.


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.


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.


> 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.


There's so much inaccuracy in your comment that I feel needs to be addressed.

> 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).

That's not correct. You're vesting 'options' i.e. the option to purchase shares at a certain price. Not shares. Even once you buy the options they are not easily liquidated.

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

If it makes zero financial sense to anyone why would you offer it?

> 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).

No, the losers in this situation are early stage startups, and employees who want to work at those companies and get rewarded in the potential upside. At an early stage startup there is no 'cash' to pay bonuses. Even if there was cash, equity comp is incredibly more valuable in a company that sees any kind of success. Clearly you're bearish on equity based comp, so be it, but it has been my experience that equity is the primary avenue people see any financial success in tech.

If any semblance of this gets passed into law, and it effects ISOs, I think it'll be the end of Silicon Valley as we know it.


> The "losers" in this situation are established companies that arguably are already in a good position to pay out bonuses in cash

If you can pay cash you can compensate your employees for the tax change. The losers are cash-poor companies. They will need to sell more shares, earlier, to pay for the change. That shifts leverage in early-stage negotiations from founders and early employees to investors. It also advantages, in the job market, firms with more cash over those with less cash.


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

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

In France that's how ISO works:

You have 2 taxable events:

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

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

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

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

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

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

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


Taxing on sale is farer or if say you get taxed on vesting and then 1 year later the company goes but do you get a tax refund I think not.


> 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.

Why would it be easy to abuse? Surely you can just set the tax basis of those shares to 0?


> 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.


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


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.


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?


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

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