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Help me understand this as it sounds interesting. So when do you get this equity? Is it only at a liquidity event? Because normally you pay taxes when you ge

Help me understand this as it sounds interesting. So when do you get this equity? Is it only at a liquidity event? Because normally you pay taxes when you get something of value, equity in this case but you can't always sell said equity due to your company being private. I'm assuming your company is private as a public company doesn't have these issues, they just give you stock, you sell stock, everyone is happy. Or put another way, how does this setup not give you a tax bill each year, assuming you get your equity each year, that you have to pay with your own cash?

roflc0ptic 6y ago
So I'm fairly ignorant about these things, but I'll give it a go. My company is an LLC. In a sense, I have this equity. This is how the value is defined: Value = Percent_Of_Shares *(Current_Price_Of_Company - Price_of_Company_At_Time_Of_Issuance) Note that, on the day these issued to me, the value here is equal to zero, because the current price of company is equal to the price of company at time they are issued. Thus, I have received something which has no value, and thus have no tax burden. Technically I'm now a partner in the LLC. This has tax implications: when the company is making money, I owe tax money on that. However, they're in growth mode, and losing money, which means I get to carry a tax writeoff. Further, it's written into the company's bylaws that if they make money, they're obligated to give employees a distribution equal to the tax burden that the employee will incur, i.e. when there is a tax burden outside of a liquidation event, they are obligated to give me enough money to cover it. Also, if they sell the company, my shares are vested immediately. I don't know what happens to them covering the taxes if I leave; maybe I become liable for it, and there's a downside there. The shares are non transferrable, which is lame but apparently quite standard.
- roflc0ptic 6y ago
  I only make money on this in the case of a liquidity event, or if the company decides to start paying "dividends" or whatever the appropriate finance word is here.
  - deleted 6y ago
    [deleted]

roflc0ptic 6y ago

So I'm fairly ignorant about these things, but I'll give it a go. My company is an LLC. In a sense, I have this equity. This is how the value is defined: Value = Percent_Of_Shares *(Current_Price_Of_Company - Price_of_Company_At_Time_Of_Issuance) Note that, on the day these issued to me, the value here is equal to zero, because the current price of company is equal to the price of company at time they are issued. Thus, I have received something which has no value, and thus have no tax burden. Technically I'm now a partner in the LLC. This has tax implications: when the company is making money, I owe tax money on that. However, they're in growth mode, and losing money, which means I get to carry a tax writeoff. Further, it's written into the company's bylaws that if they make money, they're obligated to give employees a distribution equal to the tax burden that the employee will incur, i.e. when there is a tax burden outside of a liquidation event, they are obligated to give me enough money to cover it. Also, if they sell the company, my shares are vested immediately. I don't know what happens to them covering the taxes if I leave; maybe I become liable for it, and there's a downside there. The shares are non transferrable, which is lame but apparently quite standard.

roflc0ptic 6y ago
I only make money on this in the case of a liquidity event, or if the company decides to start paying "dividends" or whatever the appropriate finance word is here.
- deleted 6y ago
  [deleted]