5 ms·

It relies on the companies own estimate of the value of those bonuses... but bonuses are discretionary and the value of private company stock can be hard to det

It relies on the companies own estimate of the value of those bonuses... but bonuses are discretionary and the value of private company stock can be hard to determine. So you could have a salary of $90k, $10k of healthcare benefits, and $30k worth of "assumed" bonuses in the form of options, restricted shares, etc. which: a) you're not certain to get anyway (because they're bonuses) b) might not really be worth $30k

mavelikara 10y ago
> the value of private company stock can be hard to determine The IRS uses 409A valuation. These valuations have been high enough to cause huge AMT burden to engineers. Sam Altman etc have written about it; Zoe Lofgren herself has been trying for years to fix it. Why do you think it is a joke?
- KirinDave 10y ago
  It is awful when you get hit by this. Modern tax law absolutely wrecks startup founders who are not already rich. It's quite stunning.
  - khuey 10y ago
    It's generally not founders who get screwed by AMT related consequences. Founders should have 83-b'd shares, not vesting options.
    - KirinDave 10y ago
      You can oy exercise 83b if you have cash on hand in advance. Hence my comment: only wealthy founders tend to get a good deal. And for Engineers and Designers it's even harder. It is very wrong to treat employees as investors when they're invariably taking major income hits to be there.
      - khuey 10y ago
        Founders should be receiving shares (not options) before any financing. Fair market value is zero, so an 83b is free. The people who get screwed are early employees, who join and get options when shares are not worth a lot but non-zero. Then your choices are front the cash to early exercise (if the company even allows that) and 83b what are probably going to be worthless shares or wait until later and find that the shares are worth a lot now but still illiquid (and risky!) and the AMT hit of exercising is enormous.
        KirinDave 10y ago
        > Founders should be receiving shares (not options) before any financing. Fair market value is zero, so an 83b is free. "Fair market value is zero, so an 83b is free." Okkkaayyyy...
- Mvandenbergh 10y ago
  I'm not an expert and 409A valuations are not a joke but the current rules around 409A valuations are there to prevent people valuing them too low to reduce taxes, not too high because - why would you? Some scenarios: A company's "real" fair market value is $50 and this is also what they report to the IRS. They issue options with a strike price of $60, which are $10 out-of-the-money. This is an allowed transaction. B) The FMV reported to the IRS is $40 but the "real" FMV is $50. Options are issued with a strike price of $50. The IRS thinks that these options are $10 out of the money and therefore allowed, but they should actually have been taxed more-or-less as income. C) The FMV reported to the IRS is $60 but the "real" FMV is $50. Options are issued with a strike price of $65. The IRS is happy that these options are out of the money, which they really are. If the IRS audits and challenges the valuation, they may come up with a price closer to $50 but that only means that too much tax might have been paid which they're not going to be too upset about. Meanwhile, for the purposes of reporting compensation of their prospective H1B staff member, the barely out of the money options look a lot better than they should. The IRS is set up to look for B, no-one looks out for C.
- Bartweiss 10y ago
  Well, part of the problem is that even if value is calculated right, there's no adjustment for liquidity. Calculating compensation for H1-B purposes based on 409A is a bit silly if there's no way to cash out. That's made all the more true by the possibility of destroying that value later, for instance by agreeing to a high-multiplier preference in later funding. I would accept 409A as a reasonable assessment of a company's value, but that's somewhat different than an assessment of what compensation an H1-B worker is getting.
  - mavelikara 10y ago
    You raise a good point about liquidity. The PDF linked by OP said "including cash bonuses and similar compensation", and the knee-jerk reaction was "it is a joke". Furthermore, it was explainted that "the value of private company stock can be hard to determine". I pointed out the 409A valuation as a response to this. I do not know if equity will be counted against income. But I think it is reasonable to count vested and exercised equity into the pay calculation. After all, IRS uses that to determine taxes.
- mnglkhn2 10y ago
  Let's say you have $30k in options and you're an H1b. Sometime in the first 4 yrs of work you're fired and you have to go out of US. How likely it is that you will exercise your, especially since you're in a serious life change/upheaval (from moving out of US and closing down anything you might have going on still) and also with an illiquid stock?!
webmaven 10y ago
Even if you do get these bonuses, don't you pay taxes on the assumed value?

mavelikara 10y ago

> the value of private company stock can be hard to determine The IRS uses 409A valuation. These valuations have been high enough to cause huge AMT burden to engineers. Sam Altman etc have written about it; Zoe Lofgren herself has been trying for years to fix it. Why do you think it is a joke?

KirinDave 10y ago
It is awful when you get hit by this. Modern tax law absolutely wrecks startup founders who are not already rich. It's quite stunning.
- khuey 10y ago
  It's generally not founders who get screwed by AMT related consequences. Founders should have 83-b'd shares, not vesting options.
  - KirinDave 10y ago
    You can oy exercise 83b if you have cash on hand in advance. Hence my comment: only wealthy founders tend to get a good deal. And for Engineers and Designers it's even harder. It is very wrong to treat employees as investors when they're invariably taking major income hits to be there.
    - khuey 10y ago
      Founders should be receiving shares (not options) before any financing. Fair market value is zero, so an 83b is free. The people who get screwed are early employees, who join and get options when shares are not worth a lot but non-zero. Then your choices are front the cash to early exercise (if the company even allows that) and 83b what are probably going to be worthless shares or wait until later and find that the shares are worth a lot now but still illiquid (and risky!) and the AMT hit of exercising is enormous.
      - KirinDave 10y ago
        > Founders should be receiving shares (not options) before any financing. Fair market value is zero, so an 83b is free. "Fair market value is zero, so an 83b is free." Okkkaayyyy...
Mvandenbergh 10y ago
I'm not an expert and 409A valuations are not a joke but the current rules around 409A valuations are there to prevent people valuing them too low to reduce taxes, not too high because - why would you? Some scenarios: A company's "real" fair market value is $50 and this is also what they report to the IRS. They issue options with a strike price of $60, which are $10 out-of-the-money. This is an allowed transaction. B) The FMV reported to the IRS is $40 but the "real" FMV is $50. Options are issued with a strike price of $50. The IRS thinks that these options are $10 out of the money and therefore allowed, but they should actually have been taxed more-or-less as income. C) The FMV reported to the IRS is $60 but the "real" FMV is $50. Options are issued with a strike price of $65. The IRS is happy that these options are out of the money, which they really are. If the IRS audits and challenges the valuation, they may come up with a price closer to $50 but that only means that too much tax might have been paid which they're not going to be too upset about. Meanwhile, for the purposes of reporting compensation of their prospective H1B staff member, the barely out of the money options look a lot better than they should. The IRS is set up to look for B, no-one looks out for C.
Bartweiss 10y ago
Well, part of the problem is that even if value is calculated right, there's no adjustment for liquidity. Calculating compensation for H1-B purposes based on 409A is a bit silly if there's no way to cash out. That's made all the more true by the possibility of destroying that value later, for instance by agreeing to a high-multiplier preference in later funding. I would accept 409A as a reasonable assessment of a company's value, but that's somewhat different than an assessment of what compensation an H1-B worker is getting.
- mavelikara 10y ago
  You raise a good point about liquidity. The PDF linked by OP said "including cash bonuses and similar compensation", and the knee-jerk reaction was "it is a joke". Furthermore, it was explainted that "the value of private company stock can be hard to determine". I pointed out the 409A valuation as a response to this. I do not know if equity will be counted against income. But I think it is reasonable to count vested and exercised equity into the pay calculation. After all, IRS uses that to determine taxes.
mnglkhn2 10y ago
Let's say you have $30k in options and you're an H1b. Sometime in the first 4 yrs of work you're fired and you have to go out of US. How likely it is that you will exercise your, especially since you're in a serious life change/upheaval (from moving out of US and closing down anything you might have going on still) and also with an illiquid stock?!

webmaven 10y ago

Even if you do get these bonuses, don't you pay taxes on the assumed value?