5 ms·

As it says in the article, the problem is that the law covers not just salary but employees' stock gains as well. Twitter and Zynga uncomplainingly pay payroll

by pg 16y ago

As it says in the article, the problem is that the law covers not just salary but employees' stock gains as well. Twitter and Zynga uncomplainingly pay payroll tax on salaries like other companies, but the growth in their valuation combined with the fact that lots of employees get stock means that if the law were enforced, Twitter and Zynga would be hit with huge extra bills that other companies aren't.

crux_ 16y ago
This is probably because other companies either aren't in SF, or aren't winning the Startup Lottery. You yourself have long advocated that the former greatly increases your chances of the latter. Now, it's late, so correct me if I'm wrong in my thinking here: If twitter magically gained $3 billion in additional valuation, and all employees cashed in all their options, all at once, it would result in a "huge" tax bill of .... $13 million or so. Compare to the ~$270 million in capital gains taxes the employees would have racked up when they exercised their options. Yeah, I think that Twitter could live just fine with that. Making a large and loud public fuss is cheaper, of course. In light of all that, I think "huge" is a misleading word to use. (Assumptions: a full 30% of the company as employee options; directly translating a higher valuation into the strike-vs-share price spread that's actually taxed.)
- pg 16y ago
  Actually I've never said that startups do better in SF specifically, but rather the Bay Area. This problem is limited to the city. The difference between the two cases is that the employees are being taxed out of money they have (if they exercise and sell) whereas the company is being taxed based not on revenues but on the appreciation of its stock. So a company whose valuation shot up in advance of anticipated revenues could find itself with a bill it had no money to pay.
  - idiopathic 16y ago
    Ah, OK, now I understand a problem I can agree with - so it's not so much the damage from paying 1.5% on a profitable transaction (employees exercise options as part of winning start-up lottery) but rather the company has to pay cash for a gain it only realised in paper. So now I understand why they were saying a company going for IPO would have to pay most of the money raised as taxes, rather than just 1.5% of it. Why is no one suggesting applying the 1.5% when cash exchanges hands? Everyone is either suggesting keeping the 1.5% as is, or scrapping it completely for stock options. But surely a middle ground allows cash for taxes as a small percentage of cash from profits?
    - crux_ 16y ago
      I'm not sure I follow your post; apologies if it's my own up-too-late-itis. "When cash exchanges hands" is when the tax does apply, assuming by that you mean options being exercised. That's why in my imaginary example a post or two ago, one of the more fantastical & unlikely parts of it was a full 30% option pool all being exercised at once. Hence, (and I apologize for any inaccuracies in paraphrase) the post you are replying to is recasting the tax as a potential cash-flow issue, rather than a great and unfair ongoing burden: because it's not.
      - idiopathic 16y ago
        My understanding was the same as yours above, but it seems that if there is a valuation event – an IPO, for example – then the rise in value of all shares is counted, not just the ones which were sold. Separately, I do not think the tax is unfair. Tax has to come from somewhere, and if SF can show a nicer environment for employees and founders to live in, then they can charge a higher price for the environment. Tax competition takes care of testing whether this is a wise decision, and there is plenty of tax competition in the region surrounding SF. To me, tax becomes unfair if it is arbitrarily applied to some people, but not to others, e.g. letting Twitter and Zynga off, while taxing other start-ups.
        crux_ 16y ago
        > My understanding was the same as yours above, but it seems that if there is a valuation event – an IPO, for example – then the rise in value of all shares is counted, not just the ones which were sold. Well, that would explain a bit of the whining, but I will need a nice solid citation before I believe a word of it. First, because I cannot fathom how it could possibly work: What's a qualifying "valuation event"? What if another event comes along and the valuation has dropped -- is the company entitled to a refund, then? Second, because that would be the only tax scheme I've ever heard of, except maybe some proposed & hair-brained wealth taxes, that directly taxes unrealized gains. (Wealth taxes I'm aware of that actually exist tax unrealized gains under simple growth assumptions, not based on any sort of actual valuation.) Third, because if that were the case you'd think that the vocal opposition would be able to articulate it more clearly. > To me, tax becomes unfair if it is arbitrarily applied to some people, but not to others, e.g. letting Twitter and Zynga off, while taxing other start-ups. Exactly the problem that the options tax was introduced to solve, as well. If there is a tax on employee compensation, why shouldn't the executive compensation of $1 salary + $300 million in options be taxed at the same effective rate as the janitor's wages? (N.b.: I think a payroll tax is dumb, but a regressive payroll tax is dumber!) (Edited a bit for clarity & removed a side comment.)
  - crux_ 16y ago
    The tax bill your hypothetical company faces will be based on options that are actually exercised. Except for an incredibly fortunate few early employees, I'd wager the vast majority of options have a strike price something higher than 1.5% current valuation ... and, viola, there's your cash to pay the bill, perfectly timed. Crisis averted! More generally, a company whose valuation shoots up but which is unable to find cash to meet shorter-term needs is Doing It Wrong and doesn't deserve the higher valuation. Musing about this tax in general, without specifically debating: I think payroll taxes of any form are one of the worst kinds of tax, so from that point of view we can agree. (Somehow I don't think you'd agree that significant increases on taxes for the wealthiest are a better alternative, though.) But, if you're going to tax wage and salary compensation, then it's more than fair to tax options and other forms of compensation, too -- otherwise you end up with a regressive payroll tax, which punishes poorer workers & companies at the same time as being far less efficient at raising the needed revenue. (edit: Part of my post was in response to something I hadn't noticed you'd edited out, so I snipped it belatedly.)
deleted 16y ago
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anigbrowl 16y ago
That's not the issue - or rather, not for the city. They are not particularly anxious to get their hands on a slice of everyone's stock options. Losing payroll revenue from Twitter for 6 years is worth less than the potential overall gain from getting the company to move into the mid-market corridor over the long term. San Francisco is facing a 3 million sqft glut of empty office space in that area over the next 12-24 months, which will mean another 10-20 years of blight if they don't head it off. By the way, anyone who's been seriously thinking about opening an office in SF should try to lock in lease terms this week. See http://www.scribd.com/doc/50842673/101155-economic-impact-final http://www.scribd.com/doc/50842673/101155-economic-impact-fi...
deleted 16y ago
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jasonkester 16y ago
That doesn't seem like a satisfactory answer to the question. It essentially translates to "they deserve to get special treatment because they're rich." Why should a company with lots of tax gains not have to pay the same taxes on them as the company next door? Certainly they were familiar with the tax code and its consequences when they set up shop in that city. The whole article reads me as simply "big successful company wants to avoid paying taxes."
- dbfclark 16y ago
  Kind of what's going on here is that only very successful companies face a large enough impact from the tax that exercising the option of exit is at all attractive. Say your SF startup was being acquired for $50mm, $10mm of which is employee equity hit by the tax (investors and founders don't pay it). You end up having to pay $150k between you, which only now is starting to be a big deal -- even one order of magnitude down, it's not worth the hassle of moving your office to a low tax jurisdiction just to dodge 15k of taxes imposed over 2-5 years -- and of course you have bigger issues to worry about so the tax doesn't matter that much. Spread over 100 or so employees and it looks like a fairly small salary increase to be paid for cost of living reasons. I faintly recall a discussion of when you should accept dilution (which a tax is) if it raises your chances of success. I tend to assume that startups locate in SF rather than the non-SF bay area for reasons that they feel give them more than a 1.5%*employee equity higher chance of success (shorter commutes for your people, etc.). More generally, it's only going to be the very large companies that want to exercise their option of exit for this reason: moving sucks and nobody wants to do it. By the time it's millions of dollars in taxes (i.e. valuation > $1bn or so) you'd think about it, but I'd guess not before. So it's not the greatest idea from a tax equity perspective: a tax only the extremely wealthy find it worth their while to dodge is still regressive. Lame capitulations to keep the few companies with this high-class problem in the city are probably correct from a utility-maximizing perspective, if kind of morally distasteful.
- pg 16y ago
  As I explain here, http://news.ycombinator.com/item?id=2331182 http://news.ycombinator.com/item?id=2331182 the problem that the companies the law applies to aren't necessarily rich; they're not being taxed on their revenues, but on their valuations, which reflect investors' hopes about their future revenues. So they're effectively being asked now for money they don't have yet. But in any case it would not be "special treatment" to exempt them; this is one of those laws that is so weird (zero other cities have it that I know of) that the only reason it has stayed on the books is that it has not actually been enforced in the past.

by pg 16y ago

crux_ 16y ago

This is probably because other companies either aren't in SF, or aren't winning the Startup Lottery. You yourself have long advocated that the former greatly increases your chances of the latter. Now, it's late, so correct me if I'm wrong in my thinking here: If twitter magically gained $3 billion in additional valuation, and all employees cashed in all their options, all at once, it would result in a "huge" tax bill of .... $13 million or so. Compare to the ~$270 million in capital gains taxes the employees would have racked up when they exercised their options. Yeah, I think that Twitter could live just fine with that. Making a large and loud public fuss is cheaper, of course. In light of all that, I think "huge" is a misleading word to use. (Assumptions: a full 30% of the company as employee options; directly translating a higher valuation into the strike-vs-share price spread that's actually taxed.)

pg 16y ago
Actually I've never said that startups do better in SF specifically, but rather the Bay Area. This problem is limited to the city. The difference between the two cases is that the employees are being taxed out of money they have (if they exercise and sell) whereas the company is being taxed based not on revenues but on the appreciation of its stock. So a company whose valuation shot up in advance of anticipated revenues could find itself with a bill it had no money to pay.
- idiopathic 16y ago
  Ah, OK, now I understand a problem I can agree with - so it's not so much the damage from paying 1.5% on a profitable transaction (employees exercise options as part of winning start-up lottery) but rather the company has to pay cash for a gain it only realised in paper. So now I understand why they were saying a company going for IPO would have to pay most of the money raised as taxes, rather than just 1.5% of it. Why is no one suggesting applying the 1.5% when cash exchanges hands? Everyone is either suggesting keeping the 1.5% as is, or scrapping it completely for stock options. But surely a middle ground allows cash for taxes as a small percentage of cash from profits?
  - crux_ 16y ago
    I'm not sure I follow your post; apologies if it's my own up-too-late-itis. "When cash exchanges hands" is when the tax does apply, assuming by that you mean options being exercised. That's why in my imaginary example a post or two ago, one of the more fantastical & unlikely parts of it was a full 30% option pool all being exercised at once. Hence, (and I apologize for any inaccuracies in paraphrase) the post you are replying to is recasting the tax as a potential cash-flow issue, rather than a great and unfair ongoing burden: because it's not.
    - idiopathic 16y ago
      My understanding was the same as yours above, but it seems that if there is a valuation event – an IPO, for example – then the rise in value of all shares is counted, not just the ones which were sold. Separately, I do not think the tax is unfair. Tax has to come from somewhere, and if SF can show a nicer environment for employees and founders to live in, then they can charge a higher price for the environment. Tax competition takes care of testing whether this is a wise decision, and there is plenty of tax competition in the region surrounding SF. To me, tax becomes unfair if it is arbitrarily applied to some people, but not to others, e.g. letting Twitter and Zynga off, while taxing other start-ups.
      - crux_ 16y ago
        > My understanding was the same as yours above, but it seems that if there is a valuation event – an IPO, for example – then the rise in value of all shares is counted, not just the ones which were sold. Well, that would explain a bit of the whining, but I will need a nice solid citation before I believe a word of it. First, because I cannot fathom how it could possibly work: What's a qualifying "valuation event"? What if another event comes along and the valuation has dropped -- is the company entitled to a refund, then? Second, because that would be the only tax scheme I've ever heard of, except maybe some proposed & hair-brained wealth taxes, that directly taxes unrealized gains. (Wealth taxes I'm aware of that actually exist tax unrealized gains under simple growth assumptions, not based on any sort of actual valuation.) Third, because if that were the case you'd think that the vocal opposition would be able to articulate it more clearly. > To me, tax becomes unfair if it is arbitrarily applied to some people, but not to others, e.g. letting Twitter and Zynga off, while taxing other start-ups. Exactly the problem that the options tax was introduced to solve, as well. If there is a tax on employee compensation, why shouldn't the executive compensation of $1 salary + $300 million in options be taxed at the same effective rate as the janitor's wages? (N.b.: I think a payroll tax is dumb, but a regressive payroll tax is dumber!) (Edited a bit for clarity & removed a side comment.)
- crux_ 16y ago
  The tax bill your hypothetical company faces will be based on options that are actually exercised. Except for an incredibly fortunate few early employees, I'd wager the vast majority of options have a strike price something higher than 1.5% current valuation ... and, viola, there's your cash to pay the bill, perfectly timed. Crisis averted! More generally, a company whose valuation shoots up but which is unable to find cash to meet shorter-term needs is Doing It Wrong and doesn't deserve the higher valuation. Musing about this tax in general, without specifically debating: I think payroll taxes of any form are one of the worst kinds of tax, so from that point of view we can agree. (Somehow I don't think you'd agree that significant increases on taxes for the wealthiest are a better alternative, though.) But, if you're going to tax wage and salary compensation, then it's more than fair to tax options and other forms of compensation, too -- otherwise you end up with a regressive payroll tax, which punishes poorer workers & companies at the same time as being far less efficient at raising the needed revenue. (edit: Part of my post was in response to something I hadn't noticed you'd edited out, so I snipped it belatedly.)

deleted 16y ago

[deleted]

anigbrowl 16y ago

That's not the issue - or rather, not for the city. They are not particularly anxious to get their hands on a slice of everyone's stock options. Losing payroll revenue from Twitter for 6 years is worth less than the potential overall gain from getting the company to move into the mid-market corridor over the long term. San Francisco is facing a 3 million sqft glut of empty office space in that area over the next 12-24 months, which will mean another 10-20 years of blight if they don't head it off. By the way, anyone who's been seriously thinking about opening an office in SF should try to lock in lease terms this week. See http://www.scribd.com/doc/50842673/101155-economic-impact-final http://www.scribd.com/doc/50842673/101155-economic-impact-fi...

deleted 16y ago

[deleted]

jasonkester 16y ago

That doesn't seem like a satisfactory answer to the question. It essentially translates to "they deserve to get special treatment because they're rich." Why should a company with lots of tax gains not have to pay the same taxes on them as the company next door? Certainly they were familiar with the tax code and its consequences when they set up shop in that city. The whole article reads me as simply "big successful company wants to avoid paying taxes."

dbfclark 16y ago
Kind of what's going on here is that only very successful companies face a large enough impact from the tax that exercising the option of exit is at all attractive. Say your SF startup was being acquired for $50mm, $10mm of which is employee equity hit by the tax (investors and founders don't pay it). You end up having to pay $150k between you, which only now is starting to be a big deal -- even one order of magnitude down, it's not worth the hassle of moving your office to a low tax jurisdiction just to dodge 15k of taxes imposed over 2-5 years -- and of course you have bigger issues to worry about so the tax doesn't matter that much. Spread over 100 or so employees and it looks like a fairly small salary increase to be paid for cost of living reasons. I faintly recall a discussion of when you should accept dilution (which a tax is) if it raises your chances of success. I tend to assume that startups locate in SF rather than the non-SF bay area for reasons that they feel give them more than a 1.5%*employee equity higher chance of success (shorter commutes for your people, etc.). More generally, it's only going to be the very large companies that want to exercise their option of exit for this reason: moving sucks and nobody wants to do it. By the time it's millions of dollars in taxes (i.e. valuation > $1bn or so) you'd think about it, but I'd guess not before. So it's not the greatest idea from a tax equity perspective: a tax only the extremely wealthy find it worth their while to dodge is still regressive. Lame capitulations to keep the few companies with this high-class problem in the city are probably correct from a utility-maximizing perspective, if kind of morally distasteful.
pg 16y ago
As I explain here, http://news.ycombinator.com/item?id=2331182 http://news.ycombinator.com/item?id=2331182 the problem that the companies the law applies to aren't necessarily rich; they're not being taxed on their revenues, but on their valuations, which reflect investors' hopes about their future revenues. So they're effectively being asked now for money they don't have yet. But in any case it would not be "special treatment" to exempt them; this is one of those laws that is so weird (zero other cities have it that I know of) that the only reason it has stayed on the books is that it has not actually been enforced in the past.