4 ms·

I’m talking about startups, not big public companies. That approach doesn’t work so well when the startup shares are illiquid and no market exists to sell them

I’m talking about startups, not big public companies. That approach doesn’t work so well when the startup shares are illiquid and no market exists to sell them at vesting or tax time. In the USA this isn’t an issue because you can make an 83(b) election with our tax authority which basically means “I elect to pay taxes when I sell, rather than at vesting.” So as your illiquid startup shares vest and you accumulate paper wealth, you pay zero taxes on those vested options unless and until the company goes public, is acquired, pays dividends, etc. If the company goes under, as most startups do, you owe the tax man nothing. To my knowledge no equivalent setup exists under German tax law.

hef19898 6y ago
Which doesn't prevent companies from issuing them, does it? Obviously, I'm no tax expert. I did hear of enough instances where people in the US owed taxes for basically worthless shares here on HN. And in case you assume the shares are going to be worthless, just sell to cover taxes when they vest. No harm to your bottom line. And a potential upside.
- garmaine 6y ago
  Yes, because both you the employee and the company have to make active steps to structure the equity grants in a very specific way to get the favorable tax treatment, and if you screw up or skip a step you can get hit with an unexpected tax bill. But there IS a process. AFAIK there is no such thing in many European jurisdictions, like Germany. > And in case you assume the shares are going to be worthless, just sell to cover taxes when they vest. ...how? Sell to whom? On what market? I think you’re missing the point. These are pre-IPO shares with explicit sale restrictions that prevent you from selling.
  - hef19898 6y ago
    Back to the start-up? Or just combine the RSUs with a cash bonus large enough to cover the taxes? Both solutions would work.
    - garmaine 6y ago
      Both solutions would require the company to have a prohibitive amount of their investment money set aside to cover the tax costs to employees of vested options. That both has perverse incentives and is a very substantial innovation tax—making investments in startups even more risky, and raising funds more difficult (since doing so at an increasing valuation also increases the capital requirements needed to cover the tax bill of future veering events). The American approach is simple: no sale, no profit, no tax. If Europe wants their own Silicon Valley, they need to adopt similar startup-friendly tax laws.
      - hef19898 6y ago
        We talk about companies awash in VC money. This whole tax discussion looks a lot like helping VC more than actual employees. Or like finding excuses and scape goats why these companies aren't doing such things right now.
        emteycz 6y ago
        There is nothing like 'companies awash in VC money' in Europe. The investments here are laughable compared to US, or China, and the products are mostly not really innovative, because of the risk, as discussed here.
  - jashmatthews 6y ago
    > Yes, because both you the employee and the company have to make active steps to structure the equity grants in a very specific way to get the favorable tax treatment, and if you screw up or skip a step you can get hit with an unexpected tax bill. Not offering options because you're employees have to pay income tax on all the value rather than capital gains tax on most of the value is ridiculous.
jashmatthews 6y ago
Advice I had via work and my Steuerberater is that options are taxable on excise rather vesting. What you can't do is early excise while also deferring the tax until sale.

hef19898 6y ago

Which doesn't prevent companies from issuing them, does it? Obviously, I'm no tax expert. I did hear of enough instances where people in the US owed taxes for basically worthless shares here on HN. And in case you assume the shares are going to be worthless, just sell to cover taxes when they vest. No harm to your bottom line. And a potential upside.

garmaine 6y ago
Yes, because both you the employee and the company have to make active steps to structure the equity grants in a very specific way to get the favorable tax treatment, and if you screw up or skip a step you can get hit with an unexpected tax bill. But there IS a process. AFAIK there is no such thing in many European jurisdictions, like Germany. > And in case you assume the shares are going to be worthless, just sell to cover taxes when they vest. ...how? Sell to whom? On what market? I think you’re missing the point. These are pre-IPO shares with explicit sale restrictions that prevent you from selling.
- hef19898 6y ago
  Back to the start-up? Or just combine the RSUs with a cash bonus large enough to cover the taxes? Both solutions would work.
  - garmaine 6y ago
    Both solutions would require the company to have a prohibitive amount of their investment money set aside to cover the tax costs to employees of vested options. That both has perverse incentives and is a very substantial innovation tax—making investments in startups even more risky, and raising funds more difficult (since doing so at an increasing valuation also increases the capital requirements needed to cover the tax bill of future veering events). The American approach is simple: no sale, no profit, no tax. If Europe wants their own Silicon Valley, they need to adopt similar startup-friendly tax laws.
    - hef19898 6y ago
      We talk about companies awash in VC money. This whole tax discussion looks a lot like helping VC more than actual employees. Or like finding excuses and scape goats why these companies aren't doing such things right now.
      - emteycz 6y ago
        There is nothing like 'companies awash in VC money' in Europe. The investments here are laughable compared to US, or China, and the products are mostly not really innovative, because of the risk, as discussed here.
- jashmatthews 6y ago
  > Yes, because both you the employee and the company have to make active steps to structure the equity grants in a very specific way to get the favorable tax treatment, and if you screw up or skip a step you can get hit with an unexpected tax bill. Not offering options because you're employees have to pay income tax on all the value rather than capital gains tax on most of the value is ridiculous.

jashmatthews 6y ago

Advice I had via work and my Steuerberater is that options are taxable on excise rather vesting. What you can't do is early excise while also deferring the tax until sale.