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I'm not following why there is a tax bill. If the stocks are founder stock or RSU, then the employee should have done an 83b election to avoid paying tax as th

by raylad 4y ago

I'm not following why there is a tax bill. If the stocks are founder stock or RSU, then the employee should have done an 83b election to avoid paying tax as they vest. If they are options, then the employee is under no obligation to exercise them, and owes no tax until they are exercised. What am I missing?

BlackjackCF 4y ago
Like you said, if the employees filed an 83b, they would be in the clear. However, the article’s talking about some of Stripe’s earliest employees, who might not have elected to file an 83b because the company was still unestablished and risky, and filing the 83b meant potentially paying taxes on shares that might ultimately be worthless. And since these are the company’s early employees, I imagine that Stripe is doing this to try and ensure they retain them.
- raylad 4y ago
  If they were the earliest employees the stock should have been at par value, making the tax payment minimal. Later employees typically get options, which don't have the tax issue. So I'm still unclear where the tax bill is coming from.
  - yieldcrv 4y ago
    Because they didn’t get options. Stripe was flirting with going public for so long that they gave RSUs and people were trading the shares on private secondary markets. Those secondary markets have dried up in the general macroeconomic environment, so now this practice is leaving people with their pants down, complete illiquidity.
    - raylad 4y ago
      If they didn't get options, tax would have had to be paid as each RSU vested if it was not paid with an 83b election. So again, I don't see why Stripe has a tax bill now.
      - deleted 4y ago
        [deleted]
      - kasey_junk 4y ago
        RSU don’t allow an 83b. Stripe issued double trigger RSU so the tax is only due when the second trigger occurs, which hasn’t happened yet. Some of the RSU have upcoming expiration dates as required by IRS rule. To avoid those expiration dates Stripe wants to do something. That something probably involves a big tax withholding for Stripe that must be paid in cash. Stripe doesn’t intend to go public soon so is seeking an alternate way to come up with that cash.
  - bzax 4y ago
    I don't know why you believe later employees get options. It is true that at public companies, employees often are compensated with options, but at "startup"s where the FMV of a new employee grant would be prohibitively expensive to either early exercise or pay income taxes on, employees get RSUs. Options are for small companies, and 83b elections when the exercise price can be paid by the employee upfront. RSU are for unicorns. Once the company is public and there is liquidity you can do whatever. Except backdating stock options...
    - raylad 4y ago
      Someone here is confused, and it might be me. As I understand it: In a company where the fair market value share price is $1/share, if you get granted 100 options, you owe tax on $0 because options are not taxable. If you get granted 100 RSUs which are all fully vested, you owe tax on $100 because stocks are taxable. If the RSUs are 0% vested you don't owe any tax yet. Then, if the share price goes up to $2 a share, you still owe $0 tax on your options, but if you have RSUs and 50 of them now vest, you immediately owe tax on $100 (50 x $2) - unless you did an 83b election and paid taxes on the 100 shares at $1 a share at the time you got the grant. If you exercise the options, now you owe tax on $200 (100 x $2), whether or not you can sell the stock. So again, I don't understand why Stripe would have a tax bill under any of these scenarios. The employees would have a tax bill connected with vesting of RSUs if they had not done an 83b election, but no one else would have any tax due until they (exercise in the case of options) and then sell the stock.
      - bink 4y ago
        If I'm understanding it correctly, the employees won't have a tax bill if they let the options expire, but they are presumably worth millions so they don't want to just throw that money away. If they exercise then they will owe taxes and they will also have no way to sell the shares (currently) to pay the tax bill.
        raylad 4y ago
        Sure, but options don't expire while you are an employee. So if Stripe wants to let employees sell stock, they only have to exercise options equal to the number of shares they will sell, then they can use the proceeds to pay the tax. I still don't understand why there is a tax bill for Stripe.
  - fatnoah 4y ago
    They way I'm reading the article is that there are employees that would incur large tax liabilities by exercising their options, but have no way to sell those option, so Stripe is looking to cover those taxes. Whether those employees may or may not have been able to ameliorate this by making an 83b election is moot at this point. They clearly didn't, so now something has to happen if the company wants to keep them around.
    - s1artibartfast 4y ago
      I can't read the whole article but are they planning to buy back some of the stock to cover the tax, or simply pay it as some kind of a perk. Edit: after reading the archive link, it seems that the former case is the most likely.
      - fatnoah 4y ago
        Yeah, I think it's the former, so it'll feel more like "sell to cover" for the employee. I'd have to imagine that paying it as a perk would trigger its own tax liability.
- rcme 4y ago
  Shouldn't the strike of the options make them worthless at grant time? I was under the impression that the 83b election is awesome because it basically gives you tax free grants.
  - s1artibartfast 4y ago
    That may be the case if you're employee number 10, but if the company already has a high valuation you're in trouble
    - kjellsbells 4y ago
      Making sure I get your point: if I get a job at a mature company, like amazon, and they give me, say, 100k in stock options, then AIUI filing a 83b would be painful as I'd owe taxes on 100k even before they vest. But as the stock vests, isnt that treated as income and taxed anyway? And then taxed again if I sell (as capital gains)? If so then it comes down to a gamble of whether the stock is going to go up by the time the stock vests and whether you happen to have the spare cash around to pay a tax bill. Am i reading that right?
      - zamnos 4y ago
        But as a mature company, Amazon's stock price is not likely to undergo huge swings. Thus you wouldn't file an 83b. However, a startup aiming for unicorn status will have a huge inflation in valuation on the way to being a unicorn (and beyond). If you're unlucky, doing an 83b early exercise will hit right as the valuation jumps, leaving you with a five figure tax bill. I mean, that's better than, say, an eight figure tax bill, but taking a five figure risk so early on in a companies life cycle when there's not even a proven product market fit is, well, risky. If you're in a place where losing that kind of investment because of a remotely possible potential upside, your risk tolerance is simply higher than mine. The other thing to consider is your vesting timeline. As you vest, you'll owe additional taxes, which means a sizable tax bill before there's been a liquidity event. If you are rich enough to afford that then hey, go for it. But not everyone is in a position to be able to do that.
- jossclimb 4y ago
  You cannot elect 83b on RSU's.
yieldcrv 4y ago
Very few people are in a position to pay for all their shares upon accepting a job. Which an 83b election entails. Change my view.
- yibg 4y ago
  Depends on when. If you join when the shares are with $0.10 then exercising is not going to be costly on tech salaries.
bzax 4y ago
If you do an 83b election on RSUs, you'd recognize the entire present value of the RSU grant as income in that year, and pay taxes on it. I believe you're then limited to claiming capital losses on that if you leave before it all vests, or it all ends up worthless. Stripe was already worth $9B in 2016. If you joined then, it could have been prohibitively expensive to do an 83b election. The whole point of RSUs is that you don't owe anything until there is a liquidity event, unlike options which you may be required to exercise or lose while the company is still private. However, RSUs only get this favorable treated (i.e. you've been given something of value, but can defer paying taxes on it) because they technically expire worthless if the company does not have a liquidity event in time. Thus far no successful tech company (that I know of) has screwed over its employees by casually choosing not to have a liquidity event and letting years worth of RSUs grants all expire worthless. Stripe is trying to arrange liquidity for its employees who were granted RSUs in e.g. 2016, and that expire in 2023. Those employees have not had to pay taxes as the RSUs vested, but will have a large tax bill if those RSUs do anything other than expire worthless...
- s1artibartfast 4y ago
  Can they not just let the old RSU was expire and provide new grants with an equivalent number of shares? That prevent the tax on exercising non liquid shares. Similarly, why not just offer to buy the stock back at current valuation and leave it up to the employees to settled any taxes
  - bzax 4y ago
    They certainly can let the old RSUs expire worthless, but holding up the "social contract" (as opposed to the strict legal contract) with their employees (and former employees!) while also not drawing the ire of the IRS may be a challenge. If you give new RSU grants, what time period do they vest over? What happens to current employees who leave before then, if they are required to re-earn-out their comp? What can you do at all about former employees? Will the IRS still accept that this deferred compensation is subject to "substantial risk of forfeiture" and thus the taxes on it can be deferred (see U.S. Code 409A)? Stripe is trying to do option b), buy back stock at current valuation. To do so, they need to raise a couple billion dollars. That money will go to the employees (in exchange for some stock) so that the employees can settle up their taxes, though the IRS will "cut out the middleman" so to speak, and requires Stripe to simple withhold the proceeds and remit to the IRS on the employees' behalf. The $3.5B tax bill is not "corporate tax" owed by Stripe, but employee income tax that will be owed by employees if there is a liquidity event, and which Stripe will be, in practice, required to withhold on their behalf if Stripe arrange that liquidity for them.
kasey_junk 4y ago
RSUs aren’t eligible for an 83b election.
- jossclimb 4y ago
  correct The 83b election is a provision in the Internal Revenue Code that allows employees who receive equity-based compensation (such as restricted stock) to elect to be taxed on the value of the stock at the time it is granted rather than at the time it vests. This can be beneficial for employees who believe that the value of the stock will increase over time, as they will pay taxes on the lower grant price rather than the higher vesting price. However, RSUs are different from restricted stock in that they do not represent actual ownership in the company until they are vested and settled in shares. Therefore, they cannot be subject to an 83(b) election. Instead, RSUs are generally taxed as ordinary income at the time of vesting, based on the fair market value of the underlying shares on that date.
el_nahual 4y ago
Options expire after 10 years, so employees that got grants in 2013 have to exercise them now.
deleted 4y ago
[deleted]
yibg 4y ago
Only if you join early enough for the early exercise cost to be low. Anyone that joined after the first few years probably won’t be able to or want to pay the upfront cost for early exercising.
- abledon 4y ago
  I'm gonna need a {username}.github.io/stripeipovisualizer for this, with chart.js and d3.js interactive charts. ALso, throw in 2 reddit ELI5s
- yibg 4y ago
  Also to clarify, RSUs are not exercised. They are yours when they vest and taxes are due when they vest (hence the double trigger) Early startup employees are typically granted stock options. Stock options can be exercised, and the spread is taxed. Very early stage employees typically opt to do a 83b and early exercise. In this case the tax is due right then, but because the strike price is low and spread is nominally 0, the overall cost is low as well. If you join later when your strike price is already high, it’s not financially viable for most to early exercise.
elgenie 4y ago
First of all, the issue here is with options, not RSUs. The reason employees of early stage companies don’t take 83b elections for RSUs or exercise their options early is because that dramatically ups the risk: they have to front the money for exercise (strike price * number of options) or pay the tax bill on the RSUs as income. If the company then goes belly up, the IRS doesn’t give the money back, so the employee is out of a job and also that money. It makes sense to buy in like that if and only if the person is otherwise rich and diversified enough that choosing to make the equivalent of a speculative seed investment (and usually dead lost in terms of liquidation preference) would be reasonable for their overall portfolio. That financial situation is not a common one among early startup employees.
- kgwgk 4y ago
  > First of all, the issue here is with options, not RSUs. Where is "here"? The headline "Stripe faces $3.5B tax bill as employees' shares expire" is about RSUs. The subheadline "Firm also expects to use $600 million to exercise some options" is about options.

by raylad 4y ago

BlackjackCF 4y ago

Like you said, if the employees filed an 83b, they would be in the clear. However, the article’s talking about some of Stripe’s earliest employees, who might not have elected to file an 83b because the company was still unestablished and risky, and filing the 83b meant potentially paying taxes on shares that might ultimately be worthless. And since these are the company’s early employees, I imagine that Stripe is doing this to try and ensure they retain them.

raylad 4y ago
If they were the earliest employees the stock should have been at par value, making the tax payment minimal. Later employees typically get options, which don't have the tax issue. So I'm still unclear where the tax bill is coming from.
- yieldcrv 4y ago
  Because they didn’t get options. Stripe was flirting with going public for so long that they gave RSUs and people were trading the shares on private secondary markets. Those secondary markets have dried up in the general macroeconomic environment, so now this practice is leaving people with their pants down, complete illiquidity.
  - raylad 4y ago
    If they didn't get options, tax would have had to be paid as each RSU vested if it was not paid with an 83b election. So again, I don't see why Stripe has a tax bill now.
    - deleted 4y ago
      [deleted]
    - kasey_junk 4y ago
      RSU don’t allow an 83b. Stripe issued double trigger RSU so the tax is only due when the second trigger occurs, which hasn’t happened yet. Some of the RSU have upcoming expiration dates as required by IRS rule. To avoid those expiration dates Stripe wants to do something. That something probably involves a big tax withholding for Stripe that must be paid in cash. Stripe doesn’t intend to go public soon so is seeking an alternate way to come up with that cash.
- bzax 4y ago
  I don't know why you believe later employees get options. It is true that at public companies, employees often are compensated with options, but at "startup"s where the FMV of a new employee grant would be prohibitively expensive to either early exercise or pay income taxes on, employees get RSUs. Options are for small companies, and 83b elections when the exercise price can be paid by the employee upfront. RSU are for unicorns. Once the company is public and there is liquidity you can do whatever. Except backdating stock options...
  - raylad 4y ago
    Someone here is confused, and it might be me. As I understand it: In a company where the fair market value share price is $1/share, if you get granted 100 options, you owe tax on $0 because options are not taxable. If you get granted 100 RSUs which are all fully vested, you owe tax on $100 because stocks are taxable. If the RSUs are 0% vested you don't owe any tax yet. Then, if the share price goes up to $2 a share, you still owe $0 tax on your options, but if you have RSUs and 50 of them now vest, you immediately owe tax on $100 (50 x $2) - unless you did an 83b election and paid taxes on the 100 shares at $1 a share at the time you got the grant. If you exercise the options, now you owe tax on $200 (100 x $2), whether or not you can sell the stock. So again, I don't understand why Stripe would have a tax bill under any of these scenarios. The employees would have a tax bill connected with vesting of RSUs if they had not done an 83b election, but no one else would have any tax due until they (exercise in the case of options) and then sell the stock.
    - bink 4y ago
      If I'm understanding it correctly, the employees won't have a tax bill if they let the options expire, but they are presumably worth millions so they don't want to just throw that money away. If they exercise then they will owe taxes and they will also have no way to sell the shares (currently) to pay the tax bill.
      - raylad 4y ago
        Sure, but options don't expire while you are an employee. So if Stripe wants to let employees sell stock, they only have to exercise options equal to the number of shares they will sell, then they can use the proceeds to pay the tax. I still don't understand why there is a tax bill for Stripe.
- fatnoah 4y ago
  They way I'm reading the article is that there are employees that would incur large tax liabilities by exercising their options, but have no way to sell those option, so Stripe is looking to cover those taxes. Whether those employees may or may not have been able to ameliorate this by making an 83b election is moot at this point. They clearly didn't, so now something has to happen if the company wants to keep them around.
  - s1artibartfast 4y ago
    I can't read the whole article but are they planning to buy back some of the stock to cover the tax, or simply pay it as some kind of a perk. Edit: after reading the archive link, it seems that the former case is the most likely.
    - fatnoah 4y ago
      Yeah, I think it's the former, so it'll feel more like "sell to cover" for the employee. I'd have to imagine that paying it as a perk would trigger its own tax liability.
rcme 4y ago
Shouldn't the strike of the options make them worthless at grant time? I was under the impression that the 83b election is awesome because it basically gives you tax free grants.
- s1artibartfast 4y ago
  That may be the case if you're employee number 10, but if the company already has a high valuation you're in trouble
  - kjellsbells 4y ago
    Making sure I get your point: if I get a job at a mature company, like amazon, and they give me, say, 100k in stock options, then AIUI filing a 83b would be painful as I'd owe taxes on 100k even before they vest. But as the stock vests, isnt that treated as income and taxed anyway? And then taxed again if I sell (as capital gains)? If so then it comes down to a gamble of whether the stock is going to go up by the time the stock vests and whether you happen to have the spare cash around to pay a tax bill. Am i reading that right?
    - zamnos 4y ago
      But as a mature company, Amazon's stock price is not likely to undergo huge swings. Thus you wouldn't file an 83b. However, a startup aiming for unicorn status will have a huge inflation in valuation on the way to being a unicorn (and beyond). If you're unlucky, doing an 83b early exercise will hit right as the valuation jumps, leaving you with a five figure tax bill. I mean, that's better than, say, an eight figure tax bill, but taking a five figure risk so early on in a companies life cycle when there's not even a proven product market fit is, well, risky. If you're in a place where losing that kind of investment because of a remotely possible potential upside, your risk tolerance is simply higher than mine. The other thing to consider is your vesting timeline. As you vest, you'll owe additional taxes, which means a sizable tax bill before there's been a liquidity event. If you are rich enough to afford that then hey, go for it. But not everyone is in a position to be able to do that.
jossclimb 4y ago
You cannot elect 83b on RSU's.

yieldcrv 4y ago

Very few people are in a position to pay for all their shares upon accepting a job. Which an 83b election entails. Change my view.

yibg 4y ago
Depends on when. If you join when the shares are with $0.10 then exercising is not going to be costly on tech salaries.

bzax 4y ago

If you do an 83b election on RSUs, you'd recognize the entire present value of the RSU grant as income in that year, and pay taxes on it. I believe you're then limited to claiming capital losses on that if you leave before it all vests, or it all ends up worthless. Stripe was already worth $9B in 2016. If you joined then, it could have been prohibitively expensive to do an 83b election. The whole point of RSUs is that you don't owe anything until there is a liquidity event, unlike options which you may be required to exercise or lose while the company is still private. However, RSUs only get this favorable treated (i.e. you've been given something of value, but can defer paying taxes on it) because they technically expire worthless if the company does not have a liquidity event in time. Thus far no successful tech company (that I know of) has screwed over its employees by casually choosing not to have a liquidity event and letting years worth of RSUs grants all expire worthless. Stripe is trying to arrange liquidity for its employees who were granted RSUs in e.g. 2016, and that expire in 2023. Those employees have not had to pay taxes as the RSUs vested, but will have a large tax bill if those RSUs do anything other than expire worthless...

s1artibartfast 4y ago
Can they not just let the old RSU was expire and provide new grants with an equivalent number of shares? That prevent the tax on exercising non liquid shares. Similarly, why not just offer to buy the stock back at current valuation and leave it up to the employees to settled any taxes
- bzax 4y ago
  They certainly can let the old RSUs expire worthless, but holding up the "social contract" (as opposed to the strict legal contract) with their employees (and former employees!) while also not drawing the ire of the IRS may be a challenge. If you give new RSU grants, what time period do they vest over? What happens to current employees who leave before then, if they are required to re-earn-out their comp? What can you do at all about former employees? Will the IRS still accept that this deferred compensation is subject to "substantial risk of forfeiture" and thus the taxes on it can be deferred (see U.S. Code 409A)? Stripe is trying to do option b), buy back stock at current valuation. To do so, they need to raise a couple billion dollars. That money will go to the employees (in exchange for some stock) so that the employees can settle up their taxes, though the IRS will "cut out the middleman" so to speak, and requires Stripe to simple withhold the proceeds and remit to the IRS on the employees' behalf. The $3.5B tax bill is not "corporate tax" owed by Stripe, but employee income tax that will be owed by employees if there is a liquidity event, and which Stripe will be, in practice, required to withhold on their behalf if Stripe arrange that liquidity for them.

kasey_junk 4y ago

RSUs aren’t eligible for an 83b election.

jossclimb 4y ago
correct The 83b election is a provision in the Internal Revenue Code that allows employees who receive equity-based compensation (such as restricted stock) to elect to be taxed on the value of the stock at the time it is granted rather than at the time it vests. This can be beneficial for employees who believe that the value of the stock will increase over time, as they will pay taxes on the lower grant price rather than the higher vesting price. However, RSUs are different from restricted stock in that they do not represent actual ownership in the company until they are vested and settled in shares. Therefore, they cannot be subject to an 83(b) election. Instead, RSUs are generally taxed as ordinary income at the time of vesting, based on the fair market value of the underlying shares on that date.

el_nahual 4y ago

Options expire after 10 years, so employees that got grants in 2013 have to exercise them now.

deleted 4y ago

[deleted]

yibg 4y ago

Only if you join early enough for the early exercise cost to be low. Anyone that joined after the first few years probably won’t be able to or want to pay the upfront cost for early exercising.

abledon 4y ago
I'm gonna need a {username}.github.io/stripeipovisualizer for this, with chart.js and d3.js interactive charts. ALso, throw in 2 reddit ELI5s
yibg 4y ago
Also to clarify, RSUs are not exercised. They are yours when they vest and taxes are due when they vest (hence the double trigger) Early startup employees are typically granted stock options. Stock options can be exercised, and the spread is taxed. Very early stage employees typically opt to do a 83b and early exercise. In this case the tax is due right then, but because the strike price is low and spread is nominally 0, the overall cost is low as well. If you join later when your strike price is already high, it’s not financially viable for most to early exercise.

elgenie 4y ago

First of all, the issue here is with options, not RSUs. The reason employees of early stage companies don’t take 83b elections for RSUs or exercise their options early is because that dramatically ups the risk: they have to front the money for exercise (strike price * number of options) or pay the tax bill on the RSUs as income. If the company then goes belly up, the IRS doesn’t give the money back, so the employee is out of a job and also that money. It makes sense to buy in like that if and only if the person is otherwise rich and diversified enough that choosing to make the equivalent of a speculative seed investment (and usually dead lost in terms of liquidation preference) would be reasonable for their overall portfolio. That financial situation is not a common one among early startup employees.

kgwgk 4y ago
> First of all, the issue here is with options, not RSUs. Where is "here"? The headline "Stripe faces $3.5B tax bill as employees' shares expire" is about RSUs. The subheadline "Firm also expects to use $600 million to exercise some options" is about options.