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If a startup issued RSU’s, then every vesting event would trigger income tax in that year, which employees would have to pay out of pocket, else they would be f
by URSpider94 5y ago
If a startup issued RSU’s, then every vesting event would trigger income tax in that year, which employees would have to pay out of pocket, else they would be forced to sell their illiquid pre-IPO non-preferred shares in some secondary market to pay the tax bill.
This would also make every employee into an actual shareholder as of their first vest, and startups really hate having lots of shareholders, because it generates a ton of administrative overhead and paperwork. In fact, if you reach 2000 shareholders, you have to start filing SEC reports as if you’re a public company, which nobody wants to do.
- HWR_14 5y agoDon't options vesting also trigger an income tax event? I didn't think about the limits of total shareholders. Doesn't that mean if 2000 employees got made at their employer they could deliberately trigger SEC oversight by exercising the options?
- thruhiker 5y agoExercising NSOs generates taxable income on the difference between the exercise price and the Fair Market Value (FMV) as determined by the current 409A valuation. Exercising ISOs does not generate taxable income nor immediate capital gains when the option is exercised, but you will generate capital gains in the future on the difference between the sold price and the strike price when you sell your exercised options. If you are higher income, which is common if you work for a startup on the product and engineering teams, the difference between the strike price and the FMV when exercising the option counts towards AMT calculations. It's common to pay AMT when exercising ISOs but you do generate AMT credits that can be used in future tax years when your taxable income and capital gains are below the threshold for triggering AMT. Carta has a great article on ISOs vs NSOs that goes into more detail: https://carta.com/blog/equity-101-exercising-and-taxes/ https://carta.com/blog/equity-101-exercising-and-taxes/