Whatever you think of Facebook, it is extremely prudent for Zuckerberg to diversify. If he had $1 million in non-FB assets, he would still have 99.99% of his assets in Facebook. That's a crazy amount of his wealth concentrated in one stock.
What did he do so he owes taxes?
Exercising in-the-money options is taxable. Receiving stock grants is a taxable event.
Owning stock (or options) in a company that goes public is not a taxable event.
Note that he got to sell (some?) now. Ordinary employees are still in lockout.
EDIT: The lock-up period isn't an SEC requirement; it's an agreement made with the underwriters. The S-1 filing states:
"Morgan Stanley & Co. LLC may, in its sole discretion, permit our executive officers, our directors, and the selling stockholders to sell shares prior to the expiration of the restrictive provisions contained in the “lock-up” agreements with the underwriters."
And it looks like they let him do just that.
Let's say he exercised options that earned him $5BB. (I don't know what the exact amount was. It was in the billions, no doubt.) So let's say maybe he owes $2BB in taxes. As for the rest of his shares and what they are "worth", those are going to fluctuate in value, based on the company's performance.
Now, let's say you are a FB shareholder. Ask yourself as a shareholder if the FB CEO has earned a $5BB salary. What has he done for you? How is your FB stock doing? OK, so let's say you think he is a genius and certainly deserves $5BB. Then ask yourself why he would want $5BB in income in _one year_. He wants it all right now. That's an awful lot of income. And a lot of tax to pay.
Why the rush to cash out?
Whatever happens to Facebook, he is set for life. Good for him, but not necessarily good for Facebook shareholders. He has little incentive to deliver.
Wall St. is going to love him, I can already tell.
If FB revenues continue to go up, then I'm wrong. But unless Facebook "finds" a novel business model I do not see revenue continuing to climb; I believe we are at the peak, and now begins the descent. If he waited eight years, then why not wait a little longer? I believe there is a reason now was the time. Time will tell.
MM is semi-standard English, at least in the US, because M can be confused with the M used for one thousand.
But B doesn't get confused with anything, and I've never seen BB written anywhere before this..
Hey, who else has finances that look like this?
Mark Zuckerberg, Trustee of The Mark Zuckerberg 2008 Annuity Trust dated March 13, 2008
It is the same as not paying any taxes all year on your payroll and putting the money in the market to make the interest you can, and then paying the tax man in April.
edit adding typos back in
Capitol is the building in which a legislature meets. eg: The Capitol Building.
"Capitol" comes from the name of the Capitoline hill, at the center of Rome.
As far as I understand, it's perfectly kosher to wait until the end of the year to make payments; you just have to make sure you have the money to actually pay then.
Disclaimer: I am not an accountant nor do I have expertise on this matter.
tl;dr: the gov't has cashflow problems, too, and doesn't like to issue t-bonds to finance its receivables.
(I personally ended up with a 2011 tax liability that was something like 160% of my 2010 liability, but I'd paid estimated taxes equal to my 2010 liabilities. So I had to cut the IRS a pretty big check in April, but had no penalties.)
The point is it's pretty hard to just avoid paying taxes all year (either by plain not paying your self-employment taxes or misrepresenting your situation on a W-4), bank it, and come out clean.
As for the Zuckerburg situation, what he did is pretty common. Though I have heard of an alternative to selling those shares, someone in his position could use a portion of his facebook shares as leverage and get a loan to pay the tax man, then said person could pay back the loan with the cash flows generated by the stock. Though in that scenario the interest on the loan and the cash flows of the shares would have to be favorable (i e, a finance question). Additionally, I have heard that getting a loan like that is difficult (something to do with eligibility and/or regulation), but don't quote me on that last part I am not that familiar with it myself.
> get a loan to pay the tax man
Yeah, so he pays the taxes with somebody else's money. Tax man gets paid, right? Tell me the scenario where a guy pays no taxes and isn't in trouble. This is empirically verifiable, but I don't recommend conducting the research.
Sorry for the tangent folks. I'm not commenting on Zuck's situation. The comment about not paying taxes all year is just plain wrong, and I would hate for someone to try it and get dinged. This is especially important for the newer startup people that don't have the usual single W-2 situation. That's all.
Great example: my fictional grandmother dies. She leaves me her 250 year old colonial home. Lets say that its worth $300,000.00. Lets say that for one reason or another I want to sell the home and prefer to invest that money in more real estate. I find a duplex that costs $300,000.00 (it could cost more or less, but I am keeping it the same to simplify the example) and I am reasonably certain that I can rent it out and generate a net profit per month. I find a 1031 real estate broker and set up a 1031 tax deferred exchange. Upon selling my fictionally grandmother's home for 300k, I will turn around and buy the duplex for $300. Uncle Sam get $0 in taxes. Zero. I pay the 1031 broker their fees. I paid all that I am legally bound to pay as per all the applicable tax laws in the United States. I have paid my fair share, as you called it. When I want to sell that property and most likely trade up I can keep doing the same thing and deferring the taxes indefinitely. There are further ways to minimize taxes on the rent collected, but that is beyond the scope of this simple example. There are a multitude of books on the subject discussed above and you are welcome to look up the 1031 tax code yourself.
The example above is purely to illustrate that there are in fact ways to minimize your tax burden. So as I said before, it depends.
In any case, I simply offered up an alternative which would enable Mark to keep 100% of his shares while still abiding by US tax codes. It appears you missed that point or were so obsessed with flaming me as a result of your personal opinion on tax law in the United States to grasp it. And no he doesn't pay the tax man with some else's money, he gives a creditor future cash flows in exchange for cash today to cover his capital gains that are being realized today (and again as I mentioned early only if the interest rate on the loan and his stock position is favorable for him to do so).
>Sorry for the tangent folks. I'm not commenting on Zuck's situation. The comment about not paying taxes all year is just plain wrong, and I would hate for someone to try it and get dinged. This is especially important for the newer startup people that don't have the usual single W-2 situation. That's all
Its unclear what you are referring to here. I am going to go out on a limb that while failing to grasp my own argument you went ahead and tried to insert words in my mouth as well. I never said he would avoid paying taxes all year, once again, he would be paying his taxes today with the loan, according to the analogy I put forward. I am not sure where you get off flaming someone on HN, this is not how to conduct an intelligent conversation here or anywhere else for that matter.
edit adding typos back in"
what happned here? :)
Yes, I can figure it out, but it's no fun to have to work to read comments. May as well let commenters use 113t-speak if we don't care how hard the comment is to read.
Just curious so as to not rock the boat.
Mainly I think we try to just lead by example.
For people that feel that the capital gains crowd gets special treatment…
How would you be with waiting 8 years for each paycheck, or being paid now in 2004 dollars ( paid 82 cents for each dollar you earn)?
Part of the long term capital gains reduction is a crude compensation for inflation. In this case it fails miserably because of the ludicrous ratio between profit and investment, but in the more normal case where you might make 40% while inflation came up 25% it achieves a sort of balance between tax and inflation's erosion of capital.
They got you covered. They are called "Treasury Inflation-Protected Securities". T-Bills that are inflation adjusted.
are you sure about this. to me it's pretty obvious that if you receive a million dollars in stocks and, say, 48 hours later it goes to 0, then insofar as you owed taxes on the million due immediately, you have also just lost a million in taxable income; so you write the million loss off of the million in gains for net 0 increase or decrease in your taxable amount due to this gain-and-loss.
I know the IRS can be daft, but surely if you lose the exact amount you just got, then you've just netted nothing, taxable at your marginal tax rate on that gain for that type of gain, times nothing = nothing.
It was your choice to let your bet ride by keeping it in the stock.
You can use the capital loss to off-set capital gains but you owe income tax on money you make when cashing out options.
How can a type of income possibly be in a different bucket from loss of that very type of income?
This doesn't make any sense to me.
Still, this would likely end up in separate buckets. Someone giving you a million dollars in stock very likely counts as income, not capital gains. You'll have a tax liability for $1MM in income. Then, should it actually go to zero, you've got a $1MM capital loss. In general, capital losses are not fully deductible against income, only capital gains. I hope you also had a $1MM capital gain so you can do something with the loss...
But again, this case is pretty contrived. Likely if you're getting a large amount of stock like in this example, you know it's coming, and can decide what to do about it before it suddenly goes to 0. (Hint: holding onto it is deciding to let it ride.)
How can this possibly be what the tax code says? It just is.
Lets say you have 10,000 options with a strike price of $1 and the stock is trading at $11.
Instead of sending a check for $10,000 to the broker and receiving the stock, you tell them to sell 3,000 options for $33,000, have them keep $10,000 to pay for the options and send $23,000 to the IRS.
If you got the stock as a gift, or (more likely in this startup context) an RSU grant, the entire value is taxed as ordinary income at the time you receive the shares. I don't think there's any special AMT treatment here.
If you purchased the stock using NQOs (non-qualified options), the difference between the strike price and fair market value is taxed as ordinary income at the time of purchase, and again I don't think there's any special AMT treatment.
If you purchased the stock using ISOs (incentive stock options), then you have to watch out for AMT -- under normal rules, you don't owe tax at time of purchase, and when you sell, if you held long enough, the gain from strike price to FMV at purchase time may be taxed as capital gains. But under AMT rules, the purchase is a taxable event, and you may owe tax at exercise time.
Under any of these, if you exercise (or are gifted) shares and hold them and they decline, you may end up owing taxes on the higher on-paper value that never meant real money to you, and this ends up feeling unfair. But this case is generally obvious enough you would see it coming, except in the ISO+AMT case which is much less obvious, and this difference is what screwed a lot of people in the 2000-era bubble burst.
Normal disclaimer: I'm not a lawyer or accountant, there are many more details that apply here, and you need to figure out what applies to you before making any important decisions. But I believe the above is basically true.
A lot of people got screwed badly by this during the dot-com boom/bust, and it did lead to changes in how startups grant ordinary employees equity.
If you're ever in the situation of being given stock or options and you're not 100% sure of the implications, TALK TO AN ACCOUNTANT IMMEDIATELY.
If you want to know why: It's because I personally believe the future of social networks is to niche, with disparate social networks connected via a Distributed Social Networking Protocol. Your social network account will be more like your email account. I think Facebook will find itself on the wrong side of history when that battle starts by trying to lock down it's data and lock people into Facebook.
That's just my belief and I'm open to the possibility that it could be completely wrong, so don't go crazy with the down votes.
But if we're just talking about the next 12 to 24 months, then, oh yes, of course he will.
Regarding the Zuck = Jobs. Absolutely not. Yes, they are both product people. But Mark Zuckerberg does not have the same aura or doesn't necessarily have the same depth of intellectuality that Jobs (college dropout or not) had. When I see Mark Zuckerberg, I think more of the Bill Gates or our time than an artistic genius with deep root in counter-culture lifestyle.
Bill's vision was: a computer on every desk. When he was saying this, this was very bold.
Really great point. I love the reasoning you give to back up your arbitrary statements.
Please make it happen, someone. No doubt a lot of people dislike being locked into long-term contracts with service providers, be they cellphone, cable, email or social networking services.
This sounds a lot like the subreddit system.
I think that Jeff Bezos is more Jobs than Zuckerberg is, but who knows.
Hahahaha. That's a funny thought.
But now that you mention it, yes. Though maybe with a slightly less endeared/worshipping sentiment.
I'm always divided on this as a shareholder, but more often than not I do trust the founders more than the open market, yes. They have an emotional stake in the company that goes beyond short-term economic interests, and I've seen enough companies flounder after the market jettisons the people who built it, and enough recoveries when the founders return, to question the wisdom of shareholder power.
Seriously. If the founders don't want shareholders mucking with their property, then don't go public. Stay private.
If you don't like founders keeping control, don't buy their shares.
There is nothing about going public that implies a general relinquishment of control of the company, nor is there anything about going public that mandates a particular ownership or power structure. Companies have "gone public" by selling only a few percent of their stock. Split voting rights are very common. None of this is even remotely illegal or unethical so long as it is disclosed, as it has been here.
If you do not like a company's control structure, you do not have to invest in it, whether the company is "public" or "private". As a shareholder, your relationship to the company is the same whether it's public or private.
His performance as a CEO is essential to ensuring solid performance for the company, but the stock price - like every other public share - is now at the mercy of macro variables that affect the performance of the equity markets as a whole...
Mark Zuckerberg is being prudent in diversifying a fraction of his exposure away not just from FB, but also from the asset class and perhaps even the currency / country.
C'mon, is anyone here willing to admit that they would not cash-out a small fraction of $18 bn tied to a single stock if you had the ability to do so??
I mean what do you do with such an astronomical figure of money like that as an individual ?
Insiders were dumping their stock in the days leading up to the IPO.
What does that say about their perceived value of the company over the long-term?
Nothing, of course. Yes, that makes perfect sense.
Of could it could be he wanted to spread his risk around, or pay his taxes.
This is just a thought experiment, but I think fb brilliantly played wall-street and now has enough money to build an infrastructure. Internet advertising isn't creative, so what will the "next gen fb" look like? And is it worth investing in, speculating that it means nothing to them.
This was a scam. A Ponzi Pyramid Scheme. A cash-grab.
Didn't Mark spend 1 Billion on the Instagram acquisition?
Did he pay them off with equity? Why did he spend so much on instagram?
The sale of stock was about liquidity, diversity and paying off taxes. It was the right financial decision (that any advisor worth his/her fees would recommend).
Finally, Mark Zuckerberg did not buy Instagram. He negotiated the sale on behalf of a company which he happens to own a controlling interest in. Legally, Facebook and Mark Zuckerberg are different entities.
He wants to become a stock trader :D
Such a move should be prepared carefully and when executed then immediately explained with a press release.
Mark doesn't believe in FB.
Bill Gates and Paul Allen have been selling off chunks of shares for decades and it's not like they don't believe in Microsoft.
I'd be thinking "island".
What sort of half hearted investment is that?
While lwhi's "correction" better reflected my (admittedly ill-communicated) sentiment, it still feels as though there's a Digg-like oligarchical groupthink seeping into Hacker News as of late, which is no more preferable to the Wild West antics of r/programming... =\
(there you go, fixed it for you... )