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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 s

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.
- crux_ 16y ago
  You're splitting hairs. A company whose valuation rises enough for this to become an issue is very rich in a very real sense. Second, most events that would cause such a huge rise in valuation are accompanied by a huge influx of cash. There may be some tiny edge cases, but a gangbusters IPO ain't one. The bill is due once a year, and imagining a company being without the cash for it stretches my imagination to the breaking point. Third, "being asked now for money they don't have yet" is the entire reason the company is selling equity in the first place. They can surely budget for an extra 0.015 of an already proportionally tiny amount. Fourth, they aren't taxed on valuations but on, to coin a term, their employees' realized compensation. This may be based on valuation, but justifiably so, since compensation is compensation. Hell, a company with bottomless greed and a deep commitment to nickle & diming could probably find a way write the tax bill into their options contracts. Fifth, the weird part of the law is that it is structured as a payroll tax rather than as an income, capital gains, or wealth tax. Otherwise it appears to be a very honest attempt to fairly tax different forms of compensation in a non-regressive way.

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.

crux_ 16y ago
You're splitting hairs. A company whose valuation rises enough for this to become an issue is very rich in a very real sense. Second, most events that would cause such a huge rise in valuation are accompanied by a huge influx of cash. There may be some tiny edge cases, but a gangbusters IPO ain't one. The bill is due once a year, and imagining a company being without the cash for it stretches my imagination to the breaking point. Third, "being asked now for money they don't have yet" is the entire reason the company is selling equity in the first place. They can surely budget for an extra 0.015 of an already proportionally tiny amount. Fourth, they aren't taxed on valuations but on, to coin a term, their employees' realized compensation. This may be based on valuation, but justifiably so, since compensation is compensation. Hell, a company with bottomless greed and a deep commitment to nickle & diming could probably find a way write the tax bill into their options contracts. Fifth, the weird part of the law is that it is structured as a payroll tax rather than as an income, capital gains, or wealth tax. Otherwise it appears to be a very honest attempt to fairly tax different forms of compensation in a non-regressive way.