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They are going to get hammered on taxes, though. The IPO price sets the income they are taxed on while the price in 6 months determines what they actually take

They are going to get hammered on taxes, though. The IPO price sets the income they are taxed on while the price in 6 months determines what they actually take home. The result is that if you’re in California and the stock price falls to 30ish, you effectively take home nothing.

rocqua 8y ago
Why is stocked taxed at the IPO value rather than the current value? Relatedly, what happens if you simply sell the stock? Seems to me like that would just generate income you owe taxes on.
- aliston 8y ago
  Employees get taxed on the value that they vest at IPO, but are locked up from selling for 6 months. The company withholds a percentage, effectively selling a portion at IPO, but it is less than the effective tax rate. I should clarify that this applies to RSUs, not options. Edit: something similar can happen with options as mentioned, but the mechanics are slightly different.
  - nostrademons 8y ago
    For RSUs the withholding should be in shares - if your effective tax rate is 40% and you vest 5 shares a month, they grant you 3 shares and immediately sell 2 to cover the taxes. If your effective tax rate was 30%, they'd round up, still sell 2 of them, but remit the cash in excess of taxes to your paycheck. At least that was how my Google shares worked. A higher IPO price works to your advantage, because the refund you get for fractional shares is worth more. You're also never in the position where you have to cover the (income) taxes for RSUs with cash from the stock sale, because the taxes have already been withheld in stock. You only have to pay capital gains when you sell.
    - dmoy 8y ago
      Except most companies (including Google) withhold supplementary income at 22% federal plus FICA, regardless of whether your marginal bracket is 22% or 35%+. Usually this results in significant underwithholding on RSU for federal tax.
      - usaar333 8y ago
        Yup, had this exact fear during my IPO. Fortunately, stock went up, so it was a win that I was underwithheld. I was and continue to be surprised companies release RSUs at IPO and not lock up expiry, the later of which avoids the tax risk.
      - acchow 7y ago
        Can you ask your employer to increase their RSU withholdings?
- nostrademons 8y ago
  Aliston is referring to a specific circumstance that screwed many employees during the dot-com boom. If you exercise your options, that creates a taxable event for the difference between your option strike price and the fair market value of the stock on date of exercise. If the stock price subsequently goes down a lot, you can end up with a tax bill greater than the market value of the stocks when the lock-up period ends. It was generally advantageous for employees in the rising stock environment of the dot-com bubble to exercise their options before the IPO, or shortly after. For one, it starts the long-term capital gains timer going, so you can sell for LTCG rates 6 months after the lockup ends rather than a year. Two, the difference between your option strike price and exercise price is taxed as income (usually - for NQs and ISOs over the AMT, but not ISOs in low tax brackets), but the difference between exercise price and sale price is taxed as capital gains. That created a situation where many employees had tax bills on stock worth less than the tax bill. This situation doesn't apply when you have straight RSUs that you sell when the lockup ends. These are withheld at income tax rates when vesting, and then taxed as capital gains rate when you sell. The IPO price doesn't matter in this case.
  - mypalmike 8y ago
    Pigs get slaughtered. Trying to time your options on a volatile stock to avoid short-term capital gains is gambling. Same-day exercise + sell is what any financial advisor will recommend. RSU risk is worse because it is outside of your control, unless of course you don't have RSUs. You get taxed on the vest date. Withholding is often at the 25% minimum government rate. Assuming you're in a no-sell window, any downward movement before you can sell increases your effective tax rate, potentially to over 100% in the worst case. Consider the dot-com crash case where your RSUs were worth $1M on the vest date, withholding is $250K, taxes owed are ~$370K, and your regular salary is $100K. If the stock goes to $0 before you can sell... On April 15, the government will demand a check from you for something around $120K, but all you actually took home was around $70K. An effective tax rate of around 170%! The real issue here might be that you can only deduct $3000 per year in losses. With $1M in losses, you'll be able to carry that over for centuries!
    - RhodesianHunter 8y ago
hcnews 8y ago
Not sure why people are downvoting you guys for telling the facts.

rocqua 8y ago

Why is stocked taxed at the IPO value rather than the current value? Relatedly, what happens if you simply sell the stock? Seems to me like that would just generate income you owe taxes on.

aliston 8y ago
Employees get taxed on the value that they vest at IPO, but are locked up from selling for 6 months. The company withholds a percentage, effectively selling a portion at IPO, but it is less than the effective tax rate. I should clarify that this applies to RSUs, not options. Edit: something similar can happen with options as mentioned, but the mechanics are slightly different.
- nostrademons 8y ago
  For RSUs the withholding should be in shares - if your effective tax rate is 40% and you vest 5 shares a month, they grant you 3 shares and immediately sell 2 to cover the taxes. If your effective tax rate was 30%, they'd round up, still sell 2 of them, but remit the cash in excess of taxes to your paycheck. At least that was how my Google shares worked. A higher IPO price works to your advantage, because the refund you get for fractional shares is worth more. You're also never in the position where you have to cover the (income) taxes for RSUs with cash from the stock sale, because the taxes have already been withheld in stock. You only have to pay capital gains when you sell.
  - dmoy 8y ago
    Except most companies (including Google) withhold supplementary income at 22% federal plus FICA, regardless of whether your marginal bracket is 22% or 35%+. Usually this results in significant underwithholding on RSU for federal tax.
    - usaar333 8y ago
      Yup, had this exact fear during my IPO. Fortunately, stock went up, so it was a win that I was underwithheld. I was and continue to be surprised companies release RSUs at IPO and not lock up expiry, the later of which avoids the tax risk.
    - acchow 7y ago
      Can you ask your employer to increase their RSU withholdings?
nostrademons 8y ago
Aliston is referring to a specific circumstance that screwed many employees during the dot-com boom. If you exercise your options, that creates a taxable event for the difference between your option strike price and the fair market value of the stock on date of exercise. If the stock price subsequently goes down a lot, you can end up with a tax bill greater than the market value of the stocks when the lock-up period ends. It was generally advantageous for employees in the rising stock environment of the dot-com bubble to exercise their options before the IPO, or shortly after. For one, it starts the long-term capital gains timer going, so you can sell for LTCG rates 6 months after the lockup ends rather than a year. Two, the difference between your option strike price and exercise price is taxed as income (usually - for NQs and ISOs over the AMT, but not ISOs in low tax brackets), but the difference between exercise price and sale price is taxed as capital gains. That created a situation where many employees had tax bills on stock worth less than the tax bill. This situation doesn't apply when you have straight RSUs that you sell when the lockup ends. These are withheld at income tax rates when vesting, and then taxed as capital gains rate when you sell. The IPO price doesn't matter in this case.
- mypalmike 8y ago
  Pigs get slaughtered. Trying to time your options on a volatile stock to avoid short-term capital gains is gambling. Same-day exercise + sell is what any financial advisor will recommend. RSU risk is worse because it is outside of your control, unless of course you don't have RSUs. You get taxed on the vest date. Withholding is often at the 25% minimum government rate. Assuming you're in a no-sell window, any downward movement before you can sell increases your effective tax rate, potentially to over 100% in the worst case. Consider the dot-com crash case where your RSUs were worth $1M on the vest date, withholding is $250K, taxes owed are ~$370K, and your regular salary is $100K. If the stock goes to $0 before you can sell... On April 15, the government will demand a check from you for something around $120K, but all you actually took home was around $70K. An effective tax rate of around 170%! The real issue here might be that you can only deduct $3000 per year in losses. With $1M in losses, you'll be able to carry that over for centuries!
  - RhodesianHunter 8y ago

hcnews 8y ago

Not sure why people are downvoting you guys for telling the facts.