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We had the plan vetted by lawyers and accountants. It's a taxable event should it trigger, but by then you have money to pay the taxes. It's not taxable at its
by dhh 15y ago
We had the plan vetted by lawyers and accountants. It's a taxable event should it trigger, but by then you have money to pay the taxes. It's not taxable at its implementation.
- patio11 15y agoI know you guys have competent professional advice, but I was a little worried about a scenario where somebody a little less tax accountant-y copy/pastes the entire plan except for that bit about excluding former employees. Boom! It totally didn't look like a SQL injection but it was important anyhow! Equity compensation schemes are like programming language manuals and spellbooks of eldritch power: every word in here can kill you.
- dcurtis 15y agoThe bonus would, however, be taxed as income and not as capital gains. That's kind of a bummer.
- gojomo 15y agoIndeed. In a large exit, this could more-than-halve what employees net, moving the proceeds from a 15-20% long-term capital-gains rate up to a 35-40% regular-income rate.
- SoftwareMaven 15y agoBut this is a true bonus, since employees are compensated fully in their paychecks, unlike options that typically replace some amount of salary.
- billforsternz 15y agoHow is 60-65% less than half of 80-85% ?
- smackfu 15y agoIf it is taxed as W2 income, you also need to pay social security and medicare, another 7.65%. State taxes may also differ, if the state has a separate capital gains rate. Also, the max federal capital gains rate is 15% as far as I know.
- gojomo 15y agoYes, I mispoke, and should have said 'more-than-double what they pay in taxes', rather than talking about the net. In a max-tax scenario (high-tax state like California, expiration of the Bush tax cuts in 2013), the bulk of a large exit would be taxed at about 53% if ordinary income, but only about 33% if long-term capital gains treatment can be obtained. So they'd be netting about 30% less due to the 'bonus' approach rather than equity. (I'm counting medicare tax, which no longer phases out any income, but not social security, which isn't collected on income over ~$107K.)
- smackfu 15y agoSame as non-qualifed employee stock options in that regard.
- startupcomment 15y agoVery interesting employee "benefit." I wonder if it would be considered as an employee benefit subject to reporting requirements / oversight by the U.S. Department of Labor or other federal agency?