7 ms·

Bernie's plan to hike taxes on some startup employees

58 points by riazrizvi 7y ago

pablok2 7y ago
So, removing incentives and expecting the same results?
- deleted 7y ago
  [deleted]
- m0zg 7y ago
  Communism in a nutshell. I'm not sure why anyone would be surprised.
- Supermancho 7y ago
  Incentives augment the motivation to achieve, not determine it.
CyanBird 7y ago
Sounds like a non-issue > Sources familiar with the legislation tell me that there could still be tweaks to the language, so don't be surprised if all of this gets addressed. Particularly given that a top Sanders campaign advisor is Rep. Ro Khanna (D-CA), whose district includes such Silicon Valley burgs as Cupertino and Sunnyvale. > The bottom line: This isn't about how much people pay in taxes. It's about when they pay it. It would make more sense for the timing to match the receipt.
diebeforei485 7y ago
This would only further income inequality. Those with family funds to exercise their options and pay the taxes immediately will be at an advantage.
- toomuchtodo 7y ago
  So you keep tweaking the law to make it more equitable, while still ensuring the appropriate taxes are paid.
- jiveturkey 7y ago
  You've badly misunderstood the article. (Maybe the article is wrong tho, and it's you that got it right. I didn't read the bill.) This bill changes when taxes are due for non-quals. You already pay taxes upon exercise of non-quals. So the ability to pay at exercise does almost nothing to further inequality. In fact it's hugely risky and in almost all cases, a bad idea that leads to lots of money lost. In that sense, having the money to pay the taxes (anyway) improves inequality to the degree that it saps the assets of those with family funds and distributes it (via programs paid for via taxes) to the less fortunate. The opposite of what you're claiming, and what is the case today. This bill changes the tax to become due at vesting. It will either not pass, or will become immediately ineffective as vesting schedules change to a 10 year cliff, with a single [4-year] pro-rata vest upon termination. IOW, for tax purposes you won't vest-as-you-go anymore. You'll vest all at once upon termination. If you choose to not buy your options the company will cancel the option agreement. If you do choose to buy them, the tax consequences are identical as today. Such a thing would be awful for ISOs but for non-quals it doesn't matter. For ISOs you want to buy them early as you can. For non-quals you pay tax upon exercise, so you don't want to buy them as-you-vest anyway. It's very poorly thought out.
  - sidewndr46 7y ago
    It's also hilarious when you think about it. For almost all startup employees, a long enough time scale reveals that the real value of those stock options is exactly zero dollars. This would have people paying taxes on fictional or purported wealth. As dumb as the tax code is, this isn't even reform.
    - dallbee 7y ago
      My understanding of the bill is that the tax would apply to the strike price value. $100,000 in strike price is quite a lot more than what your typical startup employee has, and that first $100,000 per year isn't even taxed. For this to apply to you, you'd have to be receiving a ton of options.
awinder 7y ago
“The bottom line: This isn't about how much people pay in taxes. It's about when they pay it. It would make more sense for the timing to match the receipt.” It may be worse than that, and it may be about how much people pay in taxes. It’s the same logic as tax deferred retirement accounts. The federal government is either going to spend capital immediately (no gains) or they’re going to make very constrained gains. Which makes a ton of sense, for a government. But if you let wealth sit in the private sector for a period of time, you can let it grow at rates that vastly exceed, compounded especially, what the government can pull. The taxpayer will pay more taxes in raw dollars, but they’re going to end up with more money, both sides are winning.
np_tedious 7y ago
> That means it would be most likely affect employees at later-stage startups, where the strike prices are higher. Putting aside whether or not this is a good idea (I'm sure most of us think it is not), it surely ought to be measured on fair value MINUS strike price?
- tfehring 7y ago
  The fair value of options is heavily dependent on the strike price to begin with (see [0]). The wording you quoted from TFA is strange at best, and it's inaccurate if interpreted literally - an option with a higher strike price is less valuable than an otherwise equivalent option with a lower strike price. If anything, I'd expect later-stage startups to issue options with lower strike prices relative to their current valuation (since they have less remaining growth potential than early-stage startups), which does mean employees at later-stage startups would be more likely to be impacted. For what it's worth, you can get far more upside exposure from $100k worth of options (the maximum tax-free amount per year under this plan) than you'd get from $100k worth of equity if the options are far out of the money. I'm not familiar with the specifics of how option values are calculated for early-stage startups, but I'd expect that a startup worth $20M can issue options with a strike of $100M and report those options at a fair value very close to $0. [0] https://en.wikipedia.org/wiki/Black–Scholes_model#Black–Scholes_formula https://en.wikipedia.org/wiki/Black–Scholes_model#Black–Scho...
riazrizvi 7y ago
These federal policies that don’t account for regional differences in income are a problem. The salary level where this kicks in is $130k. On the peninsula in the Bay Area where many people will be effected, the average price of a home is about 7X the national average. $130k might be a lot where home prices are $300k, but around here it’s barely a living wage. If your taxed an additional 40% on a possible $100k that you may never see, then it becomes poverty level in this area. Maybe this guy does not know what he is doing?
- gowld 7y ago
  $100k in stock at vest time valuation is an huge amount. If your are an employee with a quite large 0.05% equity grant per year, that's a $2Billion unicorn already that is ready to IPO or buy back shares from employees. > around here it’s barely a living wage I dare you to say that to your janitor or receptionist.
  - riazrizvi 7y ago
    Working in a startup that turns into a pre-ipo $2bn unicorn is like winning the startup lottery. The majority of years spent in early stage startups is spent accumulating worthless stock, where paper valuations will never materialize outside a funding negotiation room. > I dare you to say that to your janitor or receptionist. Yes I understand unskilled workers are worse off, but I’m not sure what your argument is there.
  - hurricanetc 7y ago
    > I dare you to say that to your janitor or receptionist. Whataboutism. Just because other problems exist does not make this problem not exist.
  - kdamica 7y ago
    Janitors in SF doing pretty well: https://www.cnbc.com/2016/11/04/how-one-bay-area-janitor-made-276000-last-year.html https://www.cnbc.com/2016/11/04/how-one-bay-area-janitor-mad...
    - 7y ago
unlinked_dll 7y ago
It's already horseshit that the income is taxed on exercise. Just treat capital gains as normal income and tax it when the gains are realized as cash. I hope this doesn't apply to options without liquidity. Otherwise we should just go ahead and tax scratchers on their potential prize value at purchase. If this goes through I guess I can't work for a startup anymore. I'm already paying too much in taxes and rent to build wealth, might as well give up on innovating for a small company and work someplace that can pay me and give me options on stocks that I can sell. What a dumb idea Bernie, and I want to vote for you.
- cjbprime 7y ago
  If it goes through, startups will need to change their employee incentives to compensate, and companies who don't will find that they're now way below market rate. For example: https://danluu.com/startup-options/ https://danluu.com/startup-options/
  - pmiller2 7y ago
    Startups are already way below market rate if the market includes public companies, and you only count liquid stock compensation. The only startups that even come close are ones that are about to IPO.
- riazrizvi 7y ago
  Yes. So is that really the point here, to make it increasingly harder for people to not work in large companies? Perhaps this is another example of progressive legislation that gets hijacked by incumbent big business by some clause agreed to during negotiation where people don’t know what they are agreeing to. I imagine this draft law was negotiated between concerned parties. I read a fascinating book called The Power Broker by Robert Caro, that showed how lawyers conduct a type of ambush warfare with new laws. What they are really gunning for is not apparent until the law goes into effect, it’s too subtle for people to see from the text.
- dallbee 7y ago
  I'm on board with your first suggestion - it all gets a lot simpler (and fairer) if you just tax the realized gains. For the rest though, it may be worth pointing out that the first $100,000 in qualified stock options _per year_ are not taxed. If you're in a situation where the taxes on $(your annual options) - $100,000 are significant in comparison to your rent, I'd wager you're doing pretty well.
rawland 7y ago
From the article: > Sources familiar with the legislation tell me that there > could still be tweaks to the language, so don't be > surprised if all of this gets addressed. *Particularly > given that a top Sanders campaign advisor is Rep. Ro > Khanna (D-CA), whose district includes such Silicon > Valley burgs as Cupertino and Sunnyvale.* I.e., gossip.
hurricanetc 7y ago
Get rid of corporate taxes, get rid of Roth funds, and treat all capital gains as ordinary income at the time the gains are realized. Problem solved.
- thebean11 7y ago
  Why get rid of roth funds? I'm guessing you're super against progressive taxes?
  - hurricanetc 7y ago
    Roth funds are the opposite of progressive. It’s possible to accumulate millions in roth funds where the eventual net effective tax rate is close to 0%. We already put income caps on roth funds for this reason but it’s just too easy to game. More important than that is just normalizing taxes to something people pay when they realize income instead of this convoluted system we have now.
sytelus 7y ago
If I was founding a new country today, I'd put in the constitution that governments shall not impose tax more than 33% aggregated in all forms on any person. Between federal tax, sales tax, social security, tolls, sales tax, property tax, registration fees, identity fees, license fees etc etc, governments all over the world have become one money-hungry institution that have failed to provide proportionally economically efficient services.
- lapinot 7y ago
  > have failed to provide proportionally economically efficient services This myth appealing to some automagical optimality of "free markets" has been disproved in real conditions time and time again in domains like healthcare, transports, telecoms or urban planning. Please don't pull that science string when discussing societal choices, especially out here where there will be people contradicting you that probably share your technical knowledge.
  - sytelus 7y ago
    Even in the developed world, governments have an enormous amount of process overheads and forgo optimizations that are otherwise obvious in places like a startup. This is for a reason aka very high functional guarantees which require extensive peer-reviews and associated approvals by a long hierarchy of authority in order to avoid corruption and abuse of its monopoly. This is the stuff free markets don't have to worry about. This is not a myth and no need to pull any strings. Anyone trying to prove that governments are economically efficient agency has a far harder task in theory and practice. This is why countries that limit government functions to things like defense and infrastructure often achieve faster and better economic efficiency. The countries which have expected the government to function like business to provide any and all services in return of payment called taxes have performed much worse.
    - lapinot 7y ago
      I think it's pretty obvious that we have deeply differing opinions about social organizations, as such we both have to take care not to resort to axioms of our respective ideology if we want to talk to each other. In particular, i repeat my previous point: i do not accept your use of "economic efficiency" (for me the material well-being is only a part of the goal). Again, "monopoly [..] the stuff free markets don't have to worry about": no, free markets tend to monopolies in real-life scenarios. Indeed since wealth and power distribution is already highly unequal, any kind of structure will be abusive, with incentives to use its leverage to grow an even bigger share. > The countries which have expected the government to function like business to provide any and all services in return of payment called taxes have performed much worse. Again this i do not accept. For one such a government (which is usually called socialist) is very far from a business since it is strongly limited in scope (shouldn't particularly seek expansion) and doesn't seek to extract marginal profit. Two characteristics which are in contradiction with a consensual definition of "business". It would be more accurate to describe it as a cooperative which is very much anti-capitalistic in nature (i assume you agree that "business" is a capitalistic concept).

58 points by riazrizvi 7y ago

pablok2 7y ago

So, removing incentives and expecting the same results?

deleted 7y ago
[deleted]
m0zg 7y ago
Communism in a nutshell. I'm not sure why anyone would be surprised.
Supermancho 7y ago
Incentives augment the motivation to achieve, not determine it.

CyanBird 7y ago

Sounds like a non-issue > Sources familiar with the legislation tell me that there could still be tweaks to the language, so don't be surprised if all of this gets addressed. Particularly given that a top Sanders campaign advisor is Rep. Ro Khanna (D-CA), whose district includes such Silicon Valley burgs as Cupertino and Sunnyvale. > The bottom line: This isn't about how much people pay in taxes. It's about when they pay it. It would make more sense for the timing to match the receipt.

diebeforei485 7y ago

This would only further income inequality. Those with family funds to exercise their options and pay the taxes immediately will be at an advantage.

toomuchtodo 7y ago
So you keep tweaking the law to make it more equitable, while still ensuring the appropriate taxes are paid.
jiveturkey 7y ago
You've badly misunderstood the article. (Maybe the article is wrong tho, and it's you that got it right. I didn't read the bill.) This bill changes when taxes are due for non-quals. You already pay taxes upon exercise of non-quals. So the ability to pay at exercise does almost nothing to further inequality. In fact it's hugely risky and in almost all cases, a bad idea that leads to lots of money lost. In that sense, having the money to pay the taxes (anyway) improves inequality to the degree that it saps the assets of those with family funds and distributes it (via programs paid for via taxes) to the less fortunate. The opposite of what you're claiming, and what is the case today. This bill changes the tax to become due at vesting. It will either not pass, or will become immediately ineffective as vesting schedules change to a 10 year cliff, with a single [4-year] pro-rata vest upon termination. IOW, for tax purposes you won't vest-as-you-go anymore. You'll vest all at once upon termination. If you choose to not buy your options the company will cancel the option agreement. If you do choose to buy them, the tax consequences are identical as today. Such a thing would be awful for ISOs but for non-quals it doesn't matter. For ISOs you want to buy them early as you can. For non-quals you pay tax upon exercise, so you don't want to buy them as-you-vest anyway. It's very poorly thought out.
- sidewndr46 7y ago
  It's also hilarious when you think about it. For almost all startup employees, a long enough time scale reveals that the real value of those stock options is exactly zero dollars. This would have people paying taxes on fictional or purported wealth. As dumb as the tax code is, this isn't even reform.
  - dallbee 7y ago
    My understanding of the bill is that the tax would apply to the strike price value. $100,000 in strike price is quite a lot more than what your typical startup employee has, and that first $100,000 per year isn't even taxed. For this to apply to you, you'd have to be receiving a ton of options.

awinder 7y ago

“The bottom line: This isn't about how much people pay in taxes. It's about when they pay it. It would make more sense for the timing to match the receipt.” It may be worse than that, and it may be about how much people pay in taxes. It’s the same logic as tax deferred retirement accounts. The federal government is either going to spend capital immediately (no gains) or they’re going to make very constrained gains. Which makes a ton of sense, for a government. But if you let wealth sit in the private sector for a period of time, you can let it grow at rates that vastly exceed, compounded especially, what the government can pull. The taxpayer will pay more taxes in raw dollars, but they’re going to end up with more money, both sides are winning.

np_tedious 7y ago

> That means it would be most likely affect employees at later-stage startups, where the strike prices are higher. Putting aside whether or not this is a good idea (I'm sure most of us think it is not), it surely ought to be measured on fair value MINUS strike price?

tfehring 7y ago
The fair value of options is heavily dependent on the strike price to begin with (see [0]). The wording you quoted from TFA is strange at best, and it's inaccurate if interpreted literally - an option with a higher strike price is less valuable than an otherwise equivalent option with a lower strike price. If anything, I'd expect later-stage startups to issue options with lower strike prices relative to their current valuation (since they have less remaining growth potential than early-stage startups), which does mean employees at later-stage startups would be more likely to be impacted. For what it's worth, you can get far more upside exposure from $100k worth of options (the maximum tax-free amount per year under this plan) than you'd get from $100k worth of equity if the options are far out of the money. I'm not familiar with the specifics of how option values are calculated for early-stage startups, but I'd expect that a startup worth $20M can issue options with a strike of $100M and report those options at a fair value very close to $0. [0] https://en.wikipedia.org/wiki/Black–Scholes_model#Black–Scholes_formula https://en.wikipedia.org/wiki/Black–Scholes_model#Black–Scho...

riazrizvi 7y ago

These federal policies that don’t account for regional differences in income are a problem. The salary level where this kicks in is $130k. On the peninsula in the Bay Area where many people will be effected, the average price of a home is about 7X the national average. $130k might be a lot where home prices are $300k, but around here it’s barely a living wage. If your taxed an additional 40% on a possible $100k that you may never see, then it becomes poverty level in this area. Maybe this guy does not know what he is doing?

gowld 7y ago
$100k in stock at vest time valuation is an huge amount. If your are an employee with a quite large 0.05% equity grant per year, that's a $2Billion unicorn already that is ready to IPO or buy back shares from employees. > around here it’s barely a living wage I dare you to say that to your janitor or receptionist.
- riazrizvi 7y ago
  Working in a startup that turns into a pre-ipo $2bn unicorn is like winning the startup lottery. The majority of years spent in early stage startups is spent accumulating worthless stock, where paper valuations will never materialize outside a funding negotiation room. > I dare you to say that to your janitor or receptionist. Yes I understand unskilled workers are worse off, but I’m not sure what your argument is there.
- hurricanetc 7y ago
  > I dare you to say that to your janitor or receptionist. Whataboutism. Just because other problems exist does not make this problem not exist.
- kdamica 7y ago
  Janitors in SF doing pretty well: https://www.cnbc.com/2016/11/04/how-one-bay-area-janitor-made-276000-last-year.html https://www.cnbc.com/2016/11/04/how-one-bay-area-janitor-mad...
  - 7y ago

unlinked_dll 7y ago

It's already horseshit that the income is taxed on exercise. Just treat capital gains as normal income and tax it when the gains are realized as cash. I hope this doesn't apply to options without liquidity. Otherwise we should just go ahead and tax scratchers on their potential prize value at purchase. If this goes through I guess I can't work for a startup anymore. I'm already paying too much in taxes and rent to build wealth, might as well give up on innovating for a small company and work someplace that can pay me and give me options on stocks that I can sell. What a dumb idea Bernie, and I want to vote for you.

cjbprime 7y ago
If it goes through, startups will need to change their employee incentives to compensate, and companies who don't will find that they're now way below market rate. For example: https://danluu.com/startup-options/ https://danluu.com/startup-options/
- pmiller2 7y ago
  Startups are already way below market rate if the market includes public companies, and you only count liquid stock compensation. The only startups that even come close are ones that are about to IPO.
riazrizvi 7y ago
Yes. So is that really the point here, to make it increasingly harder for people to not work in large companies? Perhaps this is another example of progressive legislation that gets hijacked by incumbent big business by some clause agreed to during negotiation where people don’t know what they are agreeing to. I imagine this draft law was negotiated between concerned parties. I read a fascinating book called The Power Broker by Robert Caro, that showed how lawyers conduct a type of ambush warfare with new laws. What they are really gunning for is not apparent until the law goes into effect, it’s too subtle for people to see from the text.
dallbee 7y ago
I'm on board with your first suggestion - it all gets a lot simpler (and fairer) if you just tax the realized gains. For the rest though, it may be worth pointing out that the first $100,000 in qualified stock options _per year_ are not taxed. If you're in a situation where the taxes on $(your annual options) - $100,000 are significant in comparison to your rent, I'd wager you're doing pretty well.

rawland 7y ago

From the article: > Sources familiar with the legislation tell me that there > could still be tweaks to the language, so don't be > surprised if all of this gets addressed. *Particularly > given that a top Sanders campaign advisor is Rep. Ro > Khanna (D-CA), whose district includes such Silicon > Valley burgs as Cupertino and Sunnyvale.* I.e., gossip.

hurricanetc 7y ago

Get rid of corporate taxes, get rid of Roth funds, and treat all capital gains as ordinary income at the time the gains are realized. Problem solved.

thebean11 7y ago
Why get rid of roth funds? I'm guessing you're super against progressive taxes?
- hurricanetc 7y ago
  Roth funds are the opposite of progressive. It’s possible to accumulate millions in roth funds where the eventual net effective tax rate is close to 0%. We already put income caps on roth funds for this reason but it’s just too easy to game. More important than that is just normalizing taxes to something people pay when they realize income instead of this convoluted system we have now.

sytelus 7y ago

If I was founding a new country today, I'd put in the constitution that governments shall not impose tax more than 33% aggregated in all forms on any person. Between federal tax, sales tax, social security, tolls, sales tax, property tax, registration fees, identity fees, license fees etc etc, governments all over the world have become one money-hungry institution that have failed to provide proportionally economically efficient services.

lapinot 7y ago
> have failed to provide proportionally economically efficient services This myth appealing to some automagical optimality of "free markets" has been disproved in real conditions time and time again in domains like healthcare, transports, telecoms or urban planning. Please don't pull that science string when discussing societal choices, especially out here where there will be people contradicting you that probably share your technical knowledge.
- sytelus 7y ago
  Even in the developed world, governments have an enormous amount of process overheads and forgo optimizations that are otherwise obvious in places like a startup. This is for a reason aka very high functional guarantees which require extensive peer-reviews and associated approvals by a long hierarchy of authority in order to avoid corruption and abuse of its monopoly. This is the stuff free markets don't have to worry about. This is not a myth and no need to pull any strings. Anyone trying to prove that governments are economically efficient agency has a far harder task in theory and practice. This is why countries that limit government functions to things like defense and infrastructure often achieve faster and better economic efficiency. The countries which have expected the government to function like business to provide any and all services in return of payment called taxes have performed much worse.
  - lapinot 7y ago
    I think it's pretty obvious that we have deeply differing opinions about social organizations, as such we both have to take care not to resort to axioms of our respective ideology if we want to talk to each other. In particular, i repeat my previous point: i do not accept your use of "economic efficiency" (for me the material well-being is only a part of the goal). Again, "monopoly [..] the stuff free markets don't have to worry about": no, free markets tend to monopolies in real-life scenarios. Indeed since wealth and power distribution is already highly unequal, any kind of structure will be abusive, with incentives to use its leverage to grow an even bigger share. > The countries which have expected the government to function like business to provide any and all services in return of payment called taxes have performed much worse. Again this i do not accept. For one such a government (which is usually called socialist) is very far from a business since it is strongly limited in scope (shouldn't particularly seek expansion) and doesn't seek to extract marginal profit. Two characteristics which are in contradiction with a consensual definition of "business". It would be more accurate to describe it as a cooperative which is very much anti-capitalistic in nature (i assume you agree that "business" is a capitalistic concept).