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> This "tax breather" is a positive step I'm really not sure that's true. Its usually a bad idea to take stock options instead of a market rate salary because

by yaur 10y ago

> This "tax breather" is a positive step I'm really not sure that's true. Its usually a bad idea to take stock options instead of a market rate salary because most options are worthless in the long run. Lots of people do it anyway because they have a fantasy about making it big. As it stands now this is a life lesson that people spend some time in their 20s figuring out and probably walk away with nothing but some valuable experience. Under the current scheme exercising illiquid options is a bad idea most of the time if you can't pay the taxes on it and this is obvious. This change doesn't make it a better idea but it makes it much less obvious that its a bad idea. That 20 something that would have walked away with nothing will be much more likely to walk away with a 6 or 7 figure tax debt that may cripple him financially for the rest of his life.

sk5t 10y ago
Exactly--this bill is a pernicious half-measure that only serves to further obfuscate the problem. One can exercise in-the-money but illiquid options without grappling today with the problem of selling them while being anchored to a heavy tax obligation ("seven years is a long time, surely by then there will be a market").
dllthomas 10y ago
If the company goes bust before you get liquid, isn't that a loss commensurate with your gain that could be used to offset it?
- grellas 10y ago
  No, you realize ordinary income tax on the spread, which is payable in full in the year realized (or in the year to which it is deferred under this measure) while the loss of the stock value is a capital loss, which can only be offset against other capital gains or deducted at the rate of $3,000 per year. So you could easily have a situation in which you realize tens or hundreds of thousands in ordinary income on which you must pay tax and have only the ability to deduct $3,000/yr against that income, i.e., a tax disaster.
  - edoceo 10y ago
    $3k/yr, right? So your loss offset in taxes plays out over a long period of time (like from 2001-2015, for your 2000 return)
    - grellas 10y ago
      Yes, that is correct and thanks for pointing out that I had not included the "/yr" after the $3K. I have now corrected it in the comment above. So, yes, you keep carrying any capital loss of this type forward until you get to deduct the whole thing over time, either at $3k/yr or as an offset against future capital gains.
  - dllthomas 10y ago
    Then that very much seems like the missing piece here...
arcticfox 10y ago
Citation / reference on most options being worthless? I feel that most companies that make it to that stage pan out beyond being worthless. I must be missing something, since I'm not that familiar with how options in startups work.
- deleted 10y ago
  [deleted]
nostrademons 10y ago
This is the current meme on Hacker News, but IMHO the pendulum has swung too far. You should absolutely be very careful about working for an early-stage startup as an employee and taking options or equity in lieu of part of your salary. You should feel that you trust the founders. You should insist that they've figured out a.) who their customers are b.) why they want the product and c.) how to make money, and have some concrete evidence that the customers do in fact want the product. You should ask about the cap table, and liquidation preferences, and anticipated future dilution, and know what percentage of the company you'll own and how much you'll make under a variety of exit scenarios. But if the numbers look good and you have solid evidence that people want the company's product, oftentimes taking more equity is the right move. Equity aligns your incentives with the company and ensures that if it does well, you do well. Under capitalism, taking cash is a loser's bargain, not in the sense that you always make less money (you often make more), but in the sense that cash dominates equity only if you've picked a losing organization. To the extent that most organizations lose, this can be rational, but to the extent that you're an independent economic actor trying to maximize your returns, it's often worth putting in the research to try and maximize your chance of picking a winner, particularly given the other career benefits of having a hot startup on your resume.
- user5994461 10y ago
  You're forgetting that options/equity/shares/whatever have many conditions AND on top of that there are complex schemes which can render them nil. The stockholders/VC know that and they are very good on the legal stuff. A salary comes with no trap. You can ensure every month that you got the money.
  - nostrademons 10y ago
    No, I remember all those. You should know what they are and how they may be used against you, and you also should have a fairly good idea if your founders are likely to do that. Just because some people are untrustworthy sociopaths does not mean all people are. If your boss wants to fuck you over, there are plenty of ways for them to do so, in career-ruining ways, even at a salaried job.

by yaur 10y ago

sk5t 10y ago

Exactly--this bill is a pernicious half-measure that only serves to further obfuscate the problem. One can exercise in-the-money but illiquid options without grappling today with the problem of selling them while being anchored to a heavy tax obligation ("seven years is a long time, surely by then there will be a market").

dllthomas 10y ago

If the company goes bust before you get liquid, isn't that a loss commensurate with your gain that could be used to offset it?

grellas 10y ago
No, you realize ordinary income tax on the spread, which is payable in full in the year realized (or in the year to which it is deferred under this measure) while the loss of the stock value is a capital loss, which can only be offset against other capital gains or deducted at the rate of $3,000 per year. So you could easily have a situation in which you realize tens or hundreds of thousands in ordinary income on which you must pay tax and have only the ability to deduct $3,000/yr against that income, i.e., a tax disaster.
- edoceo 10y ago
  $3k/yr, right? So your loss offset in taxes plays out over a long period of time (like from 2001-2015, for your 2000 return)
  - grellas 10y ago
    Yes, that is correct and thanks for pointing out that I had not included the "/yr" after the $3K. I have now corrected it in the comment above. So, yes, you keep carrying any capital loss of this type forward until you get to deduct the whole thing over time, either at $3k/yr or as an offset against future capital gains.
- dllthomas 10y ago
  Then that very much seems like the missing piece here...

arcticfox 10y ago

Citation / reference on most options being worthless? I feel that most companies that make it to that stage pan out beyond being worthless. I must be missing something, since I'm not that familiar with how options in startups work.

deleted 10y ago
[deleted]

nostrademons 10y ago

This is the current meme on Hacker News, but IMHO the pendulum has swung too far. You should absolutely be very careful about working for an early-stage startup as an employee and taking options or equity in lieu of part of your salary. You should feel that you trust the founders. You should insist that they've figured out a.) who their customers are b.) why they want the product and c.) how to make money, and have some concrete evidence that the customers do in fact want the product. You should ask about the cap table, and liquidation preferences, and anticipated future dilution, and know what percentage of the company you'll own and how much you'll make under a variety of exit scenarios. But if the numbers look good and you have solid evidence that people want the company's product, oftentimes taking more equity is the right move. Equity aligns your incentives with the company and ensures that if it does well, you do well. Under capitalism, taking cash is a loser's bargain, not in the sense that you always make less money (you often make more), but in the sense that cash dominates equity only if you've picked a losing organization. To the extent that most organizations lose, this can be rational, but to the extent that you're an independent economic actor trying to maximize your returns, it's often worth putting in the research to try and maximize your chance of picking a winner, particularly given the other career benefits of having a hot startup on your resume.

user5994461 10y ago
You're forgetting that options/equity/shares/whatever have many conditions AND on top of that there are complex schemes which can render them nil. The stockholders/VC know that and they are very good on the legal stuff. A salary comes with no trap. You can ensure every month that you got the money.
- nostrademons 10y ago
  No, I remember all those. You should know what they are and how they may be used against you, and you also should have a fairly good idea if your founders are likely to do that. Just because some people are untrustworthy sociopaths does not mean all people are. If your boss wants to fuck you over, there are plenty of ways for them to do so, in career-ruining ways, even at a salaried job.