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> No one would want options anymore, which would make it impossible for startups to compete with large, cash-rich incumbents. You're right; nobody would want o

> No one would want options anymore, which would make it impossible for startups to compete with large, cash-rich incumbents. You're right; nobody would want options. So we have to start paying people in actual shares if we want to give equity. Which means you have to give employees way more of the company than deep-pocketed investment bankers who will still invest -- despite their temper tantrums to the contrary -- because there are very few companies that can absorb a nine-to-ten figure investment and do something productive with it. Just because the system as it exists right now would be destroyed doesn't make this a bad change. The system right now is overly complicated, leads to workers abandoning in-the-money options or staying at a job they hate, and is heavily slanted towards early employees. But the current model of venture financing is largely dead regardless of whether this change goes through. It's already being replaced by cryptocurrencies / ICOs, which seem like a far more sensible method of issuing restricted stock in excess of the SEC's limitations (since the right crypto / wallet scheme for something like this would not be anonymous). I think ultimately, cryptocurrencies are going to replace RSUs, but the cryptocurrencies that replace RSUs will probably have many of the same governance restrictions as RSUs. How we treat them for tax purposes is a different problem, but it should make the RSU liquidity problem less troublesome (e.g. you can sell some of your crypto-RSUs back to the company in exchange for ETH/BTC, then convert back to USD and pay your taxes).

rsynnott 9y ago
> So we have to start paying people in actual shares if we want to give equity. People wouldn't want that either; they'd still have to pay tax on shares that were, for practical purposes, worthless at time of issue (and time tax due) and would statistically probably always be worthless. Under this system, you'd really have to abandon compensation with stock of any sort for non-publicly traded entities.
- exelius 9y ago
  I think the key here is that the valuations would change and likely be far more realistic. We certainly haven't seen the whole story on cryptocurrencies to know what regulation needs to apply, so I'll withhold any speculation there. But I have a feeling that with the amount of data a blockchain-based security gives you, the need to restrict non-publicly traded entities somewhat goes away (since you can always audit after-the-fact if the ledger is distributed). In any case, the market would be far more liquid. I'm not a huge fan of cryptocurrencies for personal use, but I absolutely think they're going to take over the world when it comes to the money used in investment finance (which is ~99% of the money on Earth).
  - austenallred 9y ago
    Why would valuations change and be more realistic if you tax illiquid stock people can’t afford to pay taxes on the gains of? Valuations would be artificially low if that were the case.
    - exelius 9y ago
      Not artificially low; the idea is to increase liquidity by tying said currencies to semi-liquid ETC/BTC (or whatever). Right now, most post-money valuations are artificially high, which has its own set of problems. These companies are being valued as if they had already accomplished their objectives, and it’s solely because the lack of liquidity allows (and after several rounds of funding, requires) VCs to obfuscate reality and get big valuations that drive big headlines which become self-reinforcing. In any case, it’s all speculative now, but in 2 years I bet we have this all figured out; and the regulators will probably catch up a few years after Trump is gone. Cryptocurrency has hit the critical inflection point where big banks are building platforms around blockchain. It’s not like this stuff isn’t already core business for Goldman et al.
      - Buge 9y ago
        I fail to see how cryptocurrencies help here at all. The only thing they do is take stuff that could be done by trusted accountants and lawyers and move it to computers. This is useful in the case where you're in a lawless wild west jurisdictionless hacker internet, or if you can't pay lawyer or accountant fees. But these startups can afford accountants and lawyers to set up contracts, and they are in the US jurisdiction so they can sue if the contracts aren't followed. So what real change do cryptocurrencies bring here?
        wpietri 9y ago
        I'm with you. The post you're replying to seems like hype word salad to me. E.g., the big-bank experimentation with blockchains I've seen has nothing to do with cryptocurrency; they're just looking at reliable distributed recordkeeping. Making stocks more liquid early on is the last things startups want; if they effectively become publicly traded, the SEC is going to push for a great deal of transparency that will be at least expensive and possibly harmful.
- sk5t 9y ago
  I suppose this only works if the IRS can be convinced that compensation value of vested options in an illiquid stock with very significant odds of perpetual $0 cashout also tend towards $0. A recipe for a very uncomfortable valuation talk...
acchow 9y ago
> So we have to start paying people in actual shares if we want to give equity This is also a big gamble if you're given shares in a non-public company. You pay taxes on these shares at vesting - not only have you reduced your liquidity until IPO/exit, but these shares could end up being worth nothing if the company fails.
- exelius 9y ago
  That's true if the system continues to work as it does today, yes. But I think the entire model of venture finance is changing towards crypto anyway, making most of these specific points moot. Crypto assets will have different regulations in some form; so I think we should look to shape regulations around cryptocurrency rather than try to cling to an outdated funding model and its associated tax dodges. Does anyone have data on the number/size of round A funding events vs ICO funding? I have a suspicion we're seeing a transfer from one into the other.
  - imh 9y ago
    If this is any indication, traditional venture capital seems to be doing pretty well: https://www.crunchbase.com/lists/recent-funding-rounds/f535c118-e157-443a-bb64-46bff7dfbe40/funding_rounds https://www.crunchbase.com/lists/recent-funding-rounds/f535c... And those are mostly just rounds raised today.
tschellenbach 9y ago
The problem with giving employees shares is that they would either need to pay for those shares or be taxed on their value. This would effectively limit early stage startup participation to those with a nicely filled bank account.
- Buge 9y ago
  I wonder if this could be solved by a contract saying a private investor will immediately buy back from you whatever percent shares are needed to cover your taxes.
dmoy 9y ago
> But the current model of venture financing is largely dead regardless of whether this change goes through. It's already being replaced by cryptocurrencies / ICOs, which seem like a far more sensible method of issuing restricted stock in excess of the SEC's limitations (since the right crypto / wallet scheme for something like this would not be anonymous). I think ultimately, cryptocurrencies are going to replace RSUs, but the cryptocurrencies that replace RSUs will probably have many of the same governance restrictions as RSUs. Is this true? I thought (perhaps incorrectly, naively) that one of the whole points of private equity being locked down and unable to sell/liquidate was just that - so that it can't be sold/liquidated. Any solution that makes it liquid goes against one of the original purposes, and thus isn't likely to happen.

rsynnott 9y ago

> So we have to start paying people in actual shares if we want to give equity. People wouldn't want that either; they'd still have to pay tax on shares that were, for practical purposes, worthless at time of issue (and time tax due) and would statistically probably always be worthless. Under this system, you'd really have to abandon compensation with stock of any sort for non-publicly traded entities.

exelius 9y ago
I think the key here is that the valuations would change and likely be far more realistic. We certainly haven't seen the whole story on cryptocurrencies to know what regulation needs to apply, so I'll withhold any speculation there. But I have a feeling that with the amount of data a blockchain-based security gives you, the need to restrict non-publicly traded entities somewhat goes away (since you can always audit after-the-fact if the ledger is distributed). In any case, the market would be far more liquid. I'm not a huge fan of cryptocurrencies for personal use, but I absolutely think they're going to take over the world when it comes to the money used in investment finance (which is ~99% of the money on Earth).
- austenallred 9y ago
  Why would valuations change and be more realistic if you tax illiquid stock people can’t afford to pay taxes on the gains of? Valuations would be artificially low if that were the case.
  - exelius 9y ago
    Not artificially low; the idea is to increase liquidity by tying said currencies to semi-liquid ETC/BTC (or whatever). Right now, most post-money valuations are artificially high, which has its own set of problems. These companies are being valued as if they had already accomplished their objectives, and it’s solely because the lack of liquidity allows (and after several rounds of funding, requires) VCs to obfuscate reality and get big valuations that drive big headlines which become self-reinforcing. In any case, it’s all speculative now, but in 2 years I bet we have this all figured out; and the regulators will probably catch up a few years after Trump is gone. Cryptocurrency has hit the critical inflection point where big banks are building platforms around blockchain. It’s not like this stuff isn’t already core business for Goldman et al.
    - Buge 9y ago
      I fail to see how cryptocurrencies help here at all. The only thing they do is take stuff that could be done by trusted accountants and lawyers and move it to computers. This is useful in the case where you're in a lawless wild west jurisdictionless hacker internet, or if you can't pay lawyer or accountant fees. But these startups can afford accountants and lawyers to set up contracts, and they are in the US jurisdiction so they can sue if the contracts aren't followed. So what real change do cryptocurrencies bring here?
      - wpietri 9y ago
        I'm with you. The post you're replying to seems like hype word salad to me. E.g., the big-bank experimentation with blockchains I've seen has nothing to do with cryptocurrency; they're just looking at reliable distributed recordkeeping. Making stocks more liquid early on is the last things startups want; if they effectively become publicly traded, the SEC is going to push for a great deal of transparency that will be at least expensive and possibly harmful.
sk5t 9y ago
I suppose this only works if the IRS can be convinced that compensation value of vested options in an illiquid stock with very significant odds of perpetual $0 cashout also tend towards $0. A recipe for a very uncomfortable valuation talk...

acchow 9y ago

> So we have to start paying people in actual shares if we want to give equity This is also a big gamble if you're given shares in a non-public company. You pay taxes on these shares at vesting - not only have you reduced your liquidity until IPO/exit, but these shares could end up being worth nothing if the company fails.

exelius 9y ago
That's true if the system continues to work as it does today, yes. But I think the entire model of venture finance is changing towards crypto anyway, making most of these specific points moot. Crypto assets will have different regulations in some form; so I think we should look to shape regulations around cryptocurrency rather than try to cling to an outdated funding model and its associated tax dodges. Does anyone have data on the number/size of round A funding events vs ICO funding? I have a suspicion we're seeing a transfer from one into the other.
- imh 9y ago
  If this is any indication, traditional venture capital seems to be doing pretty well: https://www.crunchbase.com/lists/recent-funding-rounds/f535c118-e157-443a-bb64-46bff7dfbe40/funding_rounds https://www.crunchbase.com/lists/recent-funding-rounds/f535c... And those are mostly just rounds raised today.

tschellenbach 9y ago

The problem with giving employees shares is that they would either need to pay for those shares or be taxed on their value. This would effectively limit early stage startup participation to those with a nicely filled bank account.

Buge 9y ago
I wonder if this could be solved by a contract saying a private investor will immediately buy back from you whatever percent shares are needed to cover your taxes.

dmoy 9y ago

> But the current model of venture financing is largely dead regardless of whether this change goes through. It's already being replaced by cryptocurrencies / ICOs, which seem like a far more sensible method of issuing restricted stock in excess of the SEC's limitations (since the right crypto / wallet scheme for something like this would not be anonymous). I think ultimately, cryptocurrencies are going to replace RSUs, but the cryptocurrencies that replace RSUs will probably have many of the same governance restrictions as RSUs. Is this true? I thought (perhaps incorrectly, naively) that one of the whole points of private equity being locked down and unable to sell/liquidate was just that - so that it can't be sold/liquidated. Any solution that makes it liquid goes against one of the original purposes, and thus isn't likely to happen.