5 ms·

I can't help but feel the system is highly rigged in favour of investors. Many countries have tax incentives for investors, but when it comes to people actuall

I can't help but feel the system is highly rigged in favour of investors. Many countries have tax incentives for investors, but when it comes to people actually joining startups, investing their time and effort, then all you get is a tax bill - and mostly at a highly inconvenient time to pay it! It very much feels like the system is designed to keep the rich rich, and to put the working (wo)man in their place.

hkmurakami 10y ago
Our perspective depends on the relative value/scarcity of capital. If capital is scarce and valuable, it makes sense for a system to be designed to reward and protect capital risk. But the "standard terms" haven't changed much since the 80's and capital is definitely more abundant today than it was before. Valuations for early companies are ~10x what they used to be decades ago. Founders give up a fraction of ownership compared to what they used to. The question is where the right balance point is given current parameters. Also, wages have never been higher for tech employees. I'm happy to have a 2x wage level conspared to 15 years ago rather than have the same wage but 2x equity (obviously a simplification), so something's at least working well here wrt labor gaining some ground on capital.
- LouisSayers 10y ago
  There are two different things going on here though - one is whether we offer incentives for investors. The other is how the tax system works when people receive options / equity. The problem with 'receiving' equity is that 1) Current laws treat equity as if it was cash - but it's not. 2) Whether employees should be compensated and recognised for their potential opportunity costs - essentially given a similar deal to investors. Keep in mind that many startups will offer equity in lieu of the salary that they would otherwise command. Also, if you're offered a significant portion of equity in a startup, then taxes currently make a large disincentive for people to accept and join the startup.
  - hkmurakami 10y ago
    I definitely think (1) is in need of reform. Could you elaborate on (2) on what you mean by "given a similar deal to investors"?
    - LouisSayers 10y ago
      on 2) I think if investors are rewarded for the risk they take, then other stock holders should also be rewarded for the opportunity cost they've sacrificed. So specifically, in terms of 'a similar deal' I'm talking about tax incentives. At the very least, I think tax shouldn't apply until you cash out - this just makes sense. Perhaps the system could also offer a tax incentive for lower returns for non-investor shareholders to recognise sacrificed opportunity cost as well.
beagle3 10y ago
The US is probably the worst in this respect, and I heard Canada is quite bad, but most of European tax systems follow the "pay taxes only when money comes your way" principle, which puts all investors on equal footing.
- mahyarm 10y ago
  What is the trap / bad part in Canada?
  - beagle3 10y ago
    Last time taxes came up, some canadians described the traps. I don't remember but I'm sure they'll be here again....
    - a-priori 10y ago
      The main trap I'm aware of is that exercising a stock option is considered employment income of the difference between strike and exercise price, but selling shares is considered capital gains/losses on the change in value. So, if you exercise some options, it'll trigger a tax bill on the income. No problem, at tax time you can either pay cash or sell shares to cover. But if in the meantime the company tanks and the stock drops to zero, that's capital losses and doesn't cancel out the tax bill on the income. Basically you want to exercise only when you're able to sell right away. http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/dont-let-stock-options-leave-you-with-a-nasty-tax-bill/article23527077/ http://www.theglobeandmail.com/globe-investor/personal-finan...
  - ar15saveslives 10y ago
    When you exercise your SO, you need to pay taxes, based on current price of shares, even if you don't sell them right away. SO is a joke in Canada.
    - deleted 10y ago
      [deleted]
mahyarm 10y ago
Some countries let you pay taxes on liquidation, others demand to be paid on receiving something, despite it being impossible to liquidate. The USA is the second kind of country with AMT, and that is the fundamental problem.
- hkmurakami 10y ago
  One good thing that may come out of a Trump tax reform for startups is a repeal of the AMT. Obviously rife with other consequences.

hkmurakami 10y ago

Our perspective depends on the relative value/scarcity of capital. If capital is scarce and valuable, it makes sense for a system to be designed to reward and protect capital risk. But the "standard terms" haven't changed much since the 80's and capital is definitely more abundant today than it was before. Valuations for early companies are ~10x what they used to be decades ago. Founders give up a fraction of ownership compared to what they used to. The question is where the right balance point is given current parameters. Also, wages have never been higher for tech employees. I'm happy to have a 2x wage level conspared to 15 years ago rather than have the same wage but 2x equity (obviously a simplification), so something's at least working well here wrt labor gaining some ground on capital.

LouisSayers 10y ago
There are two different things going on here though - one is whether we offer incentives for investors. The other is how the tax system works when people receive options / equity. The problem with 'receiving' equity is that 1) Current laws treat equity as if it was cash - but it's not. 2) Whether employees should be compensated and recognised for their potential opportunity costs - essentially given a similar deal to investors. Keep in mind that many startups will offer equity in lieu of the salary that they would otherwise command. Also, if you're offered a significant portion of equity in a startup, then taxes currently make a large disincentive for people to accept and join the startup.
- hkmurakami 10y ago
  I definitely think (1) is in need of reform. Could you elaborate on (2) on what you mean by "given a similar deal to investors"?
  - LouisSayers 10y ago
    on 2) I think if investors are rewarded for the risk they take, then other stock holders should also be rewarded for the opportunity cost they've sacrificed. So specifically, in terms of 'a similar deal' I'm talking about tax incentives. At the very least, I think tax shouldn't apply until you cash out - this just makes sense. Perhaps the system could also offer a tax incentive for lower returns for non-investor shareholders to recognise sacrificed opportunity cost as well.

beagle3 10y ago

The US is probably the worst in this respect, and I heard Canada is quite bad, but most of European tax systems follow the "pay taxes only when money comes your way" principle, which puts all investors on equal footing.

mahyarm 10y ago
What is the trap / bad part in Canada?
- beagle3 10y ago
  Last time taxes came up, some canadians described the traps. I don't remember but I'm sure they'll be here again....
  - a-priori 10y ago
    The main trap I'm aware of is that exercising a stock option is considered employment income of the difference between strike and exercise price, but selling shares is considered capital gains/losses on the change in value. So, if you exercise some options, it'll trigger a tax bill on the income. No problem, at tax time you can either pay cash or sell shares to cover. But if in the meantime the company tanks and the stock drops to zero, that's capital losses and doesn't cancel out the tax bill on the income. Basically you want to exercise only when you're able to sell right away. http://www.theglobeandmail.com/globe-investor/personal-finance/taxes/dont-let-stock-options-leave-you-with-a-nasty-tax-bill/article23527077/ http://www.theglobeandmail.com/globe-investor/personal-finan...
- ar15saveslives 10y ago
  When you exercise your SO, you need to pay taxes, based on current price of shares, even if you don't sell them right away. SO is a joke in Canada.
  - deleted 10y ago
    [deleted]

mahyarm 10y ago

Some countries let you pay taxes on liquidation, others demand to be paid on receiving something, despite it being impossible to liquidate. The USA is the second kind of country with AMT, and that is the fundamental problem.

hkmurakami 10y ago
One good thing that may come out of a Trump tax reform for startups is a repeal of the AMT. Obviously rife with other consequences.