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Proposed Tax Reform Stands to Impact Equity and Performance-Based Compensation
- paulsutter 9y agoSince most ISOs permit early-exercise, isn't this a moot point? (if a given ISO permits exercise upon issue, since the value of a newly issued ISO must be zero, then this $100K cap is not an issue?) > In particular, under the current tax rules, the total aggregate fair value of ISOs that become exercisable for an individual employee for the first time within a calendar year may not exceed $100,000. ISOs that fail to comply with this provision are treated as non-qualified stock options. Companies with higher valuations would easily hit this threshold for executives and highly-paid employees and therefore would have limited reprieve from 409B. EDIT: it says “become exercisable”, which is completely separate from actual exercise
- hkmurakami 9y agoI would suppose that it matters on the margins when the exercise cost is nontrivial for the early to mid career employee with low liquid assets. (Say mid 5 figures) There won't be a tax bill but they may be pressed to come up with the exercise funds
- dmitrygr 9y agoNot everyone has $x00,000 to exercise options, turning them into illiquid shares in a company which may or may not ever exit. Basically, this: https://qz.com/455109/entrepreneurs-dont-have-a-special-gene-for-risk-they-come-from-families-with-money/ https://qz.com/455109/entrepreneurs-dont-have-a-special-gene...
- fossuser 9y agoA lot of larger private companies don't allow early exercise (and even if they did the strike price is often pretty high anyway). The "become exercisable" language is ambiguous to me. If you have ISOs that became exercisable in one year that at the time were less than 100k, but you didn't exercise them and they're now worth more than that they still remain ISOs right? Would you still hit the 100k limit when you tried to exercise them if AMT is repealed or could you exercise all of them and delay the tax burden until you sell them? If that's the case getting rid of AMT would be a big deal for people in private companies to actually be able to exercise their equity without paying a massive amount of taxes for something they can't liquidate easily.
- paulsutter 9y agoI would never work for a company that doesn't allow early exercise. Whether or not you plan to do it, you have to wonder about the attitude of those in charge if they don't allow early exercise.
- jdavis703 9y agoAllowing early exercise is a legal and accounting headache. Many small startups have a hard time even getting stock option agreements to employees. When you're new, small, and possibly don't even have an HR person you can't really spend time on frivolous things like early exercise.
- fossuser 9y agoI also thought that early exercise at a certain point could force a company to go public, but it's possible I'm mixing up laws. I think it had to do with how many share holders you could have, but I think that law also changed to not include employees as share holders.
- jdavis703 9y agoThe JOBS Act changed this rule [0]: "In order to mandate becoming an SEC reporting company, you now would have to have $10 million in assets and at least 2000 shareholders or 500 shareholders who are not accredited investors. Stock issued pursuant to an employee compensation plan would not be counted for this purpose." 0: https://investmentbank.com/summary-of-jobs-bill-and-update/ https://investmentbank.com/summary-of-jobs-bill-and-update/
- drfuchs 9y agoNot sure where you’re getting the idea that it’s a hassle to offer early exercise. The 4-person company I joined back when offered early-exercise without my even asking, and it was a huge win: I just had to risk a few thousand dollars (since the valuation was low), and it meant I wasn’t forced to later exercise and sell (in order to cover taxes) as they vested, or reached the end of their exercisabilty, or when the company went public, or when it later got bought out by a bigger public company, or even when I left their employment. Instead, I got to decide when to cash in and owe taxes. But you have to be a pretty early employee for this to work well, and not require a big cash outlay up front.
- throwgoog452 9y agoThe tax bill is generally geared to screw over tech. In particular, eliminating the state income tax exemption will severely impact anyone in California. Are you still happy with #resisting anything the administration tries to do? Still happy you're censoring conservatives? Still happy Damore was fired? Still happy with your endless virtue-signaling? Still feeling good about enforcing political correctness? Still wanting to #killallmen? Here's what you get for your trouble.
- hkmurakami 9y agoThat is not true at all. Repealing AMT would be a HUGE boost to early stage startup employees.
- throwgoog452 9y agoConservatives aren't trying to fuck over startups. They're trying to fuck over Google, Facebook, and Twitter. And rightfully so. Repealing the AMT is just standard Republican elitist tax policy; that it benefits some small slice of tech is incidental.
- cattleprodigy 9y agoYes, Yes, Yes, Yes, Yes, Yes, Yes
- dang 9y agoCould you please not post unsubstantive comments here, especially on divisive topics?
- cattleprodigy 9y agoMy post was more substantial than you may have thought. The other poster effectively asked, whether some in the tech industry should sacrifice their left and liberal ideals because of some (perceived) financial threat. To that I say no.
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- hkmurakami 9y agoOverall I think average comp full time employees at eaely stage startups will be a big beneficiary. They won't hit the exercise threshold, AMT will be gone, and ISO tax benefits and 409A valuation will remain. One problem I see is that the extended exercises that are popular these days convert from ISO to NQOs, so I wonder what that treatment will be like. Contractors lose some flexibility over NQOs, but imho they were unlikely to have extended exercise periods anyways so I think the impact is not as large as communicated? Executive especially at late stage companies lose out because of the exercise cap, but they're doing extremely well anyways so whatever. Employees at late stage companies might be in a bind here. They probably won't hit the ISO exercise cap (BC the value should be 409A based target than preferred price based) but the currently popular method of giving out RSUs that don't officially "vest" until the company goes public (or the employee leaves, I imagine) might get affected, and that's potentially significant.
- deleted 9y ago[deleted]
- morgante 9y agoWhy do you assume average employees won't hit the cap? $100k isn't exactly a massive sum in tech.
- dpiers 9y agoISOs are priced at the 409a value, which can be 1/10th of the preferred share price. Generally speaking, the 409a value converges with the preferred price as the company is de-risked and moves closer to IPO.
- shmerl 9y ago> 409B does not appear to impact the taxation of incentive stock options (ISOs), which in conjunction with the repeal of the alternative minimum tax, would make ISOs more valuable So AMT is being repealed now?
- rconti 9y agoI believe AMT repeal is a part of BOTH the House and Senate plans.
- danschumann 9y agoYea, it's talked about very negatively by the president because it creates a lot of extra work, both for the IRS and tax attorneys.
- wavefunction 9y agoI would think tax attorneys would appreciate more billable hours. The 'postcard sized tax form' touted by the GOP left me wondering what the makers of TurboTax and other tax preparation software think about that specific proposal.
- jonas21 9y agoThe "postcard sized tax form" is essentially the same level of complexity as the 1040EZ, which already exists. See: https://www.vox.com/policy-and-politics/2017/8/30/16219906/paul-ryans-postcard-tax-return https://www.vox.com/policy-and-politics/2017/8/30/16219906/p...
- glymor 9y ago> Similarly, awards with vesting triggers based on exit events such as an initial public offering or change-in-control would be taxable on grant unless they require the recipient to be employed through the liquidity date Double trigger RSUs are popular in late stage unicorns where the exercise price for ISOs have already hit a high level but the stock isn't liquid enough to sell to cover the tax as they vest. A lot of people might be affected, I wonder if existing grants are grandfathered in?
- clairity 9y agothere is a section in the document called "Grandfathering of Compensation Earned Prior to 2018" =)
- weaksauce 9y agoThese grandfather clauses irk me... if the policy is not good enough to stand on its own then it should not be policy.
- 1123581321 9y agoThere is an expectation of predictability in our legislation. Grandfather clauses preserve predictability for those who made decisions based on the old tax code. Sometimes binary grandfather status is not financially or politically possible and it's phased out instead. I think this kind of approach to legislation and regulation is fair and isn't commentary on the quality of the change.
- apendleton 9y agoWithout speaking to this particular grandfather clause, I think in general these kinds of clauses deal with the fact that a new policy, good or bad, might cause people to design their incentive structures differently, and they want to avoid screwing over people who in good faith designed their structures to work best under the old system, and instead give them time to make adjustments.
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- s73ver_ 9y agoOh come on. The absolute last thing we need are more things making it harder for people to keep the options they earned after leaving the company.
- seattle_spring 9y agoYou're right! Which is why getting rid of AMT will actually make it significantly easier.
- s73ver_ 9y agoI was referring to this part: "Similarly, awards with vesting triggers based on exit events such as an initial public offering or change-in-control would be taxable on grant unless they require the recipient to be employed through the liquidity date"
- djrogers 9y agoIn my experience those vesting triggers are much less common than a fixed vesting schedule.
- PrgsvThgt 9y agoPersonally happy to see that the new tax code appears to reduce the inequality between staff and executives, with regard to compensation and taxation. I'm a strong advocate for leveling the playing field for EVERYONE; because it eliminates (or reduces to the extent possible) the ability to negotiate these special options for "deferred" compensation.... for which the vast majority of us will never qualify.
- hedora 9y agoThis doesn't do that at all. It punishes employees 100-1000 of late stage startups with unknown, perhaps bankrupting retroactive taxes. The entire 409a system was designed to protect exactly that group of employee after the dot-com crash, and this undoes it. Founders and execs likely will be fully vested before their options are worth anything at all (figure 8 years from founding to IPO, 4 years to vest).
- loeg 9y agoAt least at my employer, the deferred compensation plan is only offered to high-level management employees ("Director" and above). So this doesn't seem to be a great loss for the average engineer. If other people who are individual contributors, or even low level managers, have access to an employer deferred compensation plan (different from my experience), I would love to hear about it. (As a highly paid engineer, I would totally make use of this deferred compensation scheme to lower my tax burden by smoothing out my income, if I could. But I've never been able to.)
- fjsolwmv 9y agoAt least one of AmaFooBookSoftLe offers deferred comp to all employees.
- loeg 9y agoWhich one(s)?
- seattle_spring 9y agoI've literally never heard of a tech company not offering deferred compensation (either stock options or RSUs).
- giobox 9y agoIts not _that_ uncommon for an engineer not to receive options/RSUs. Sure it happens a lot in this industry, but it's not a hard and fast rule, especially once you leave Silicon Valley. I've certainly seen the "Director and above" approach mentioned earlier several times as well.
- loeg 9y agoRSUs aren't elective deferred compensation. They're just income at the time of vest. ISOs are a little weirder. Nevertheless, neither is what I'm talking about. Traditional 401(k)s are a type of qualified deferred compensation plan and are slightly closer to what I have in mind. The type of plan I am referring to is a non-qualified deferred compensation plan. Unlike 401(k)s, they are not protected from the sponsoring organization (or the sponsoring organization's creditors) accessing the funds, for example, in bankruptcy. On the other hand, they can smooth out income taxes, and are not subject to the same contribution caps as 401(k) plans. Like in a 401(k), these non-qualified plans allow you to control how funds are invested while they are deferred. Unlike 401(k)s, you choose when they will pay distributions in advance. Here's a little bit more about this kind of plan, from Fidelity: https://www.fidelity.com/viewpoints/retirement/nqdc https://www.fidelity.com/viewpoints/retirement/nqdc > Most companies provide NQDC plans as an executive retirement benefit, because 401(k) plans often are inadequate for high earners
- gwbas1c 9y agoHonestly, everyone's just trying to game the system. Someone figures out a way to game the tax code, and then the laws get written to support those games. Taxes are just too darn complicated! It takes far too long to figure out what I legitimately owe! I shouldn't have to pay a professional or use a computer to figure that out.
- spaceseaman 9y ago> Taxes are just too darn complicated! While I understand this sentiment, I feel that a complicated tax code (or legal code in general) is just where countries end up going as they become larger and more important in the day-to-day lives of its citizens. All the various financial situations in this country are incredibly complicated. Perhaps we should take a similar route as public defenders (not in practice but in theory, public defenders are horribly under-funded at the moment). The government could provide a tax management program for the general public that does the basics for you. Basically if you qualify for a 1040-EZ you can just use some IRS front-end system. If you have a more complicated situation, then accountants are always available. I'm frankly disappointed our governments have not done more with the Internet.
- gwbas1c 9y agoThe problem is that TurboTax lobbies against this. Basically, they benefit from our current system. That's why proposal for things like the IRS filling out your taxes for you are illegal. Really, what should happen is that the IRS mails you your taxes already filled out, you check for errors and fill in the things that aren't reported, and mail it back. This would kill TurboTax's business, so they lobby against it.
- craftyguy 9y agoSo the solution isn't to nerf the existing tax code, but instead to elect representatives that are actually looking out for their electorate instead of companies like TurboTax.
- banku_brougham 9y agoTjis tax plan is not likely to pass. It has major stakeholders as active opponents, and an impotant cadre of republican congress-people from coastal states. There’s plenty of reporting on Politco or Washington Post that outlines the difficult road ahead for this legislation.
- hkmurakami 9y agoThe GOP has high risk of losing control of one or both chambers of Congress in 2018 of they don't pass some kind of tax reform. The contents are in flux but I'd happily wager on them passing something they can point to