I did a little research on this and I am still not sure I get it. If a start up compensates key personel with stock options or RSU s that have a vesting period of one year they owe no tax for that year on the options. At one year plus a day the options vest and a tax liability is incurred. However, because they have vested the holder can exercise thier options or a portion of (thier choice) and pay thier tax liability with the proceeds. Am I missing something here?
in a private company you can't always sell your options or even stock grants. Vesting in this case only means that if you leave, you still own it. What's interesting is that they are adding this tax but working to drastically reduce death taxes on illiquid assets you bequeath your children.
Ok but wether you can or can not exercise/sell your options is covered by how your employment and articles of incorporation are written. I know of no law that would require stake holders to not sell thier stock after vesting. With the possible exception of startup that raised capital pursuant to title III of the JOBS Act. Do you?
think about it practically. You work for a startup and have a million dollars of newly vested stock. You make 100k in salary. What mechanism do you have to liquidate 25percent of your non-tradable pre-iPo stock to pay your tax bill.
Good example. Subject to advice from my attorney my quick answer would be this. In writting make the vesting schedule contingent on the company issuing its IPO or alternatively, restructure the compensation (formerly options/RSU s) as convertible debt that becomes equity upon IPO issuance. The latter would be my preference since if the company goes under the unpaid note would yield some degree of tax benifit to the employee.
I would assume a convertible debtenture would be taxable as well. To Sig's point, the whole point of working at a startup (read: a new business venture that is creating innovation and employment) is for the equity. Often you have to give up cash compensation (as the only currency these companies have is their equity). This disincentivizes people to work for startups. What happens if your stock vests and then the company goes under in my example? 250k of capital losses at 3k a year!
Yes your right. And that equity sooner or later converts to income. Whether its options, stock or convertible debt its all the same. Just write the compensation package so that it does not vest until its sellable. Whether you pay taxes on the day it vests or 10 years later does not matter. I hate it too brother but we make money we pay taxes.
You are entirely missing the point. It matters a whole hell of a lot if I have to pay taxes on options the day they vest when I'm making $50,000 a year living in San Francisco and there's a non-zero probability that I'll never even exercise the options because the company won't be in business in 5 years, vice paying those taxes when the company IPOs and the I exercise the options into stock I can easily sell for far more than I owe in taxes. Startups don't think about taxes at all except the taxes they have to pay when they're in startup phase and every dollar counts as the difference between success and failure. This bill moves taxes from the realm of "wish I didn't have to pay so much of my windfall in taxes" to "can't do this job because I can't afford taxes on money I haven't made yet". Huge Huge difference in how people make decisions and outcomes for entire industries. As for waiting for options to vest until they're sellable. First, read section 409A of the tax code. Generally deferred compensation is not only taxable but has an extra 20% tax penalty attached, and what you're proposing would clearly fall under 409A. Second, I'm not sure you get the point of vesting. It's the primary mechanism in the startup world to reward longevity of effort from employees. You give an employee a decent set of options, and put them on a 3 year vesting schedule so the longer they stay the more of the options they get. Any options that vest are theirs to keep, even if they leave before 3 years. Your idea eliminates both the central tenants of vesting, so again why blow up what's worked so well for....wait a minute why are we doing this again? Because jobs?
We're talking about a 10 person startup pre-revenue with maybe an angel investor. There in fact is a law called the Securities Act of 1933 that says you can't sell unregistered stock to anyone who isn't a qualified investor, so that eliminates more than 99% of your potential buyers. Now you've got shares worth 1% of a company notionally worth $1M, where exactly are you going to find the qualified investor to buy your notionally $10,000 worth of stock? Just a hint from someone who's been there....not happening! Just because there isn't a law against something, doesn't mean it's in any way feasible, by the way. As far as I know there's no law against traveling to Uranus either, but it's not common to expect people to do so just because "there isn't a law against it".