3 ms·

Can someone explain the 5 year deferal on options mentioned at the end of the article?

pcl 9y ago
It means that if you have vested options to buy stock at an illiquid company (one that is still private, for example), you can quit the company and defer exercising those options for up to five years after your termination date. This is in contrast to current law, which requires only 90 days of grace period. This effectively legislates what AirBnB, Pinterest and others have been doing due to free market pressure [0]. This is good for employees, since you might not have enough money to pay for the taxes on the stock that you vested and exercised (due when you exercise under current and proposed law). But arguably, it’s not really important for the government to mandate this; it’s sufficient for the government to allow deferred option exercise dates (which is the case in current law). As tptacek wrote, this has a stench of pandering to it; the new tax law is IMO largely bad (and I say this as someone who probably stands to benefit from it). But this wrinkle is most certainly better than the proposal from yesterday, which I believe would have been stifling to startups and would have pushed most startups to either defer any fund-raising to keep valuation low and thus options affordable to new hires (bad for startups and VCs; good for incumbent companies due to reduced competition), or to do huge raises to compete on salary alone (bad for startup founders and employees due to presumed higher percentagowned by VCs; perhaps good for VCs if it didn’t damage startups too much; good for incumbents since it again makes startups higher-friction). [0] https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows
- StevePerkins 9y ago
  Does this have modify or have any effect on pre-existing option grants with people's current employer? Or is it only for new option grants going forward?
  - pcl 9y ago
    This sort of thing almost always only applies to new contracts.
- inthewoods 9y ago
  Thanks for that detailed explanation - I agree with you about the new tax bill overall. Would it require companies to provide a 5 year deferral, or would it be up to the company to decide any time up to 5 years?
  - pcl 9y ago
    I haven’t waded though the amended bill [0] yet, but I assume it requires a minimum of 5 years. Current law requires a 90-day minimum and allows for up to 10 years. So companies can (and do) extend their exercise window to well past 5 years already. [0] https://www.finance.senate.gov/imo/media/doc/Master%20Tax%20Amendments.pdf https://www.finance.senate.gov/imo/media/doc/Master%20Tax%20...
- rrhyne 9y ago
  I believe it's a deferral on paying taxes on your 'earnings' from the options purchased, not a deferral on exercising.
- DenisM 9y ago
  I wonder how this will work with convertible notes? Technically you are not setting a new valuation. Unless they decide to use the cap as valuation for tax purposes. But then I imagine one could give up the cap in favor of a better liquidation preference.
bgentry 9y ago
Here is the short summary from the amendments PDF linked below: The amendment provides that certain employees who receive stock options or restricted stock units as compensation for the performance of services and later exercise such options or units may elect to defer recognition of income for up to 5 years, if the corporation’s stock is not publicly traded. Perhaps the amendment itself makes this clear, but it sounds like this does not in any way affect option exercise timelines. It sounds like this just lets you defer recognition of the income resulting from an exercise.

pcl 9y ago

It means that if you have vested options to buy stock at an illiquid company (one that is still private, for example), you can quit the company and defer exercising those options for up to five years after your termination date. This is in contrast to current law, which requires only 90 days of grace period. This effectively legislates what AirBnB, Pinterest and others have been doing due to free market pressure [0]. This is good for employees, since you might not have enough money to pay for the taxes on the stock that you vested and exercised (due when you exercise under current and proposed law). But arguably, it’s not really important for the government to mandate this; it’s sufficient for the government to allow deferred option exercise dates (which is the case in current law). As tptacek wrote, this has a stench of pandering to it; the new tax law is IMO largely bad (and I say this as someone who probably stands to benefit from it). But this wrinkle is most certainly better than the proposal from yesterday, which I believe would have been stifling to startups and would have pushed most startups to either defer any fund-raising to keep valuation low and thus options affordable to new hires (bad for startups and VCs; good for incumbent companies due to reduced competition), or to do huge raises to compete on salary alone (bad for startup founders and employees due to presumed higher percentagowned by VCs; perhaps good for VCs if it didn’t damage startups too much; good for incumbents since it again makes startups higher-friction). [0] https://github.com/holman/extended-exercise-windows https://github.com/holman/extended-exercise-windows

StevePerkins 9y ago
Does this have modify or have any effect on pre-existing option grants with people's current employer? Or is it only for new option grants going forward?
- pcl 9y ago
  This sort of thing almost always only applies to new contracts.
inthewoods 9y ago
Thanks for that detailed explanation - I agree with you about the new tax bill overall. Would it require companies to provide a 5 year deferral, or would it be up to the company to decide any time up to 5 years?
- pcl 9y ago
  I haven’t waded though the amended bill [0] yet, but I assume it requires a minimum of 5 years. Current law requires a 90-day minimum and allows for up to 10 years. So companies can (and do) extend their exercise window to well past 5 years already. [0] https://www.finance.senate.gov/imo/media/doc/Master%20Tax%20Amendments.pdf https://www.finance.senate.gov/imo/media/doc/Master%20Tax%20...
rrhyne 9y ago
I believe it's a deferral on paying taxes on your 'earnings' from the options purchased, not a deferral on exercising.
DenisM 9y ago
I wonder how this will work with convertible notes? Technically you are not setting a new valuation. Unless they decide to use the cap as valuation for tax purposes. But then I imagine one could give up the cap in favor of a better liquidation preference.

bgentry 9y ago

Here is the short summary from the amendments PDF linked below: The amendment provides that certain employees who receive stock options or restricted stock units as compensation for the performance of services and later exercise such options or units may elect to defer recognition of income for up to 5 years, if the corporation’s stock is not publicly traded. Perhaps the amendment itself makes this clear, but it sounds like this does not in any way affect option exercise timelines. It sounds like this just lets you defer recognition of the income resulting from an exercise.