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(Uninvolved growth-stage CFO perspective) The IRS mandates that stock option grants expire after 10 years. My best guess is these early employees are quickly a

(Uninvolved growth-stage CFO perspective) The IRS mandates that stock option grants expire after 10 years. My best guess is these early employees are quickly approaching those grants' 10 year mark, and face an exercise or "lose it" situation. If you exercise, you have to pay the gain. For early employees, this could/would be a massive bill -- probably well into the 7-8 digit range for some early hires. Stripe seems to be teeing up a secondary sale of these stocks themselves -- where Stripe is offering to buy some of their shares back from those early employees, allowing the employees to exercise ('buy") all of those early options and (at least) pay their tax bill. Usually, a company will limit the # of shares eligible for a secondary purchase so current/former employees can buy all the stock, sell enough to the company to cover that person's resulting tax bill, and keep the remaining stock until IPO. By limiting the # of shares they will allow to be purchased via the secondary, Stripe will almost certainly make sure the secondary does not create post-tax cash gains to make people wealthy! It doesn't have to be that way: Stripe could allow ANY investor to buy the shares directly from those employees -- but guessing Stripe has a blocking right on stock transfers-- so they have, and will continue to block early employee sales to new investors. Stripe and many companies have these transfer "veto right" to make sure they can control their ownership ("cap table") and also to make sure early employees don't get rich before the IPO. This is my best guess-- I am not familiar with the Stripe's situation.

paxys 4y ago
> This is my best guess-- I am not familiar with the Stripe's situation. All of what you said is literally the content of the article.
- noahmbarr 4y ago
  Other people asked a bunch of q's so I tried to present it a little differently Key concepts that were net-new from the article: * 10 year concept IRS restriction * Concept of a transfer Block essentially requiring a company sponsored secondary * Idea that Stripe could stay out of it, and just allow (partially) transfer waiver to 3rd party investor * The concept of most startups strong preference against creating liquid wealth events for early employees prior to IPO Perhaps you knew all of this, but the other commenters didn't seem to have this knowledge top of mind.
Swizec 4y ago
> to make sure early employees don't get rich before the IPO But why? What's wrong with early people getting wealthy?
- dboreham 4y ago
  Getting wealthy before VCs isn't good.
  - mrexroad 4y ago
    Gotta keep those workers hungry!
    - nlitened 4y ago
      Will somebody please think of the poor workers with 500k salaries?
- deleted 4y ago
  [deleted]
- rodgerd 4y ago
  They're the wrong sort of people.
- deleted 4y ago
  [deleted]
- akamia 4y ago
  The concern could be a brain drain. If lots of your early employees cash out and leave, you are potentially losing a lot of historical knowledge and expertise at a time when you are trying to build up to a successful IPO. Early employees often leave after an IPO. At that time, it is still disruptive but the company's priorities have changed.
  - Analemma_ 4y ago
    It's difficult to sympathize with Stripe when these options coming up on the ten-year mark, especially because we all know the reason it has been taking so long is that they would really like to just raise private capital forever instead of giving these employees their due.
throw3823423 4y ago
It's pretty accurate: Employees don't have a few million in change, each, to turn the RSUs into plain stock. I don't think the issue is making employees wealthy or not: It's 10 year old RSUs, so most of them are owned by former employees. But consider the size: If the tax bill is 3.5B, the full size of the grants we are talking about here is over 10B! last valuations in the press are at something like 60b. So 1 in 6 shares in the secondary market? Might as well be an actual IPO. Without 2022 going the way it did, I'd have expected that there would have been yet another regular round, where the investors ate enough common stock for current and former employees to vest the RSUs. That, or maybe the company really IPOs, which clears out all the comp problems. But Stripe finds it very valuable to keep the company closed, so instead of IPOing when everyone else does, they delayed too much. So there's no real need for not wanting people to get rich here: It's just a very uncomfortable amount of stock to have to turn into liquidity either way.
- morepork 4y ago
  I wonder whether there could be space here for a bank to come in and specialise in loans to cover the tax bill, using the currently pre-IPO stock as security
  - kodah 4y ago
    Pre-IPO stock is about as secure as super glue based on toothpicks and bubblegum.
  - MajimasEyepatch 4y ago
    Some companies are doing that, like https://vested.co/ https://vested.co/.
    - zamnos 4y ago
      http://getquid.com http://getquid.com http://secfi.com http://secfi.com
  - renewiltord 4y ago
    That's literally what the Bolt CEO did. He ran a company that offered his employees the loans.
choppaface 4y ago
Some start-ups will both help employees exercise 83b as well as even bonus them the amount to cover the strike. Then if an employee leaves, the non-vested shares are clawed back and the bonus is not returned. If Stripe did this, wouldn’t they have avoided much of the tax issues here? It seems they’re only able to raise in this case because of their strong valuation and success. Like, most companies either could not do this, or would only do it for the founders. Moreover, what about performance-based comp for employees instead of time-vested ISOs? For example, employee gets percentage X at different valuation targets where these is liquidity? The ISO basically prohibits employees from having shareholder voting power where they work. Perf-based comp could perhaps offer employees the same fraction of a percent of any windfall while simplifying the tax / equity risks, which are very outsized for employees who are not accredited investors.
- acjohnson55 4y ago
  Yeah, but they would have had to have spent a lot more cash upfront, both in the bonus amounts and the payroll taxes on those amounts. ISOs are pretty ideal for early stage companies because they are very cash efficient and very light on taxes pre-liquidity. They begin to get more complicated when the company has non-negligible value. But they're still alright as long as you don't get to the point where the options are expiring without liquidity. The real question is why has Stripe allowed this to happen? I'm not sure what you mean with the performance-based comp to comment on that idea.
  - choppaface 4y ago
    While it's true that cover-to-exercise is more cash-intensive, if it's only for the first 50 or so employees, it would seem viable for a company like Stripe that has strong cash flow. The problem with ISOs is they effectively halve the value of the award due to taxes, and furthermore can impose extremely risky tax situations on people who can't afford to lose much (e.g. employees who exercise before IPO). Performance-based comp could follow the public CEO comp model where the percentage of the package vests as a function of share price and/or milestones like liquidity events. Usually the milestones are also KPI-related, but ignore that for a moment. The packages could be RSUs and/or cash. This way the employees don't have to deal with the risk of options, and the company doesn't have to vest shares until they're actually worth something and taxes can be paid. Not sure how the package could survive after termination. It could end up being regulated the same way AMT was introduced but ... the reason ISOs exist is tradition, not because modern tax risks. Should be open for disruption / competition.
dataflow 4y ago
> guessing Stripe has a blocking right on stock transfers Often there's right of first refusal, but blocking rights? Do they actually have that? Is this common? If so, (why) would they need right of first refusal?
- rpearl 4y ago
  At least some companies have board approval of transfers. Less common but not exactly weird
- samclearman 4y ago
  Yes, it's common. They'll say that it's because they don't want unapproved investors on their cap table, which I guess is reasonable, but obviously the main reason is "because they can".
- tetranoir 4y ago
  It's supposed to prevent hostile takeovers.
orangepurple 4y ago
Can you work out a payment plan with the IRS for such a massive bill?
- theIV 4y ago
  As far as I'm aware, yes. I believe the IRS would much rather get money than no money. Note: I'm about to try this myself (though far less massive).
cyanydeez 4y ago
Why do people act like the tax's is greater than the cash flow, like it's some unthinkable crime to pay tax.
- samclearman 4y ago
  In this case, the way it works is: 1. You exercise your options, for a paper gain of millions of dollars 2. However, you can't actually sell the shares (there are likely contractual restrictions on selling them, and even if not, there's not a liquid market) 3. So you have to pay millions of dollars of taxes even though your cash flow is zero. And before you say "but they're ISOs", there's no such thing as ISO's under AMT so it doesn't help at all.
  - chii 4y ago
    > for a paper gain of millions of dollars which is why this part should never have been taxed. Until there's a sale of those shares, the price is merely an estimate and thus is not and should not be considered the FMV.
    - samclearman 4y ago
      Not sure what you mean by "should" here, but the IRS definitely considers it to be a gain that you have to pay taxes on, regardless of whether you can sell the shares.
      - zamnos 4y ago
        Yes that's exactly the problem. Why does it seem okay for the IRS to demand a million dollars from someone who has no way to pay that? Like, doesn't that seem like something is wrong/broken somewhere? There's a cottage industry of loan sharks who will lend people money so they can pay, but how about instead the IRS not take money from people who don't yet, and may not ever, actually have the money to pay, until they, y'know, have the ability to pay off that tax bill.
      - Keyframe 4y ago
matchagaucho 4y ago
IIRC there's still a limit of 2,000 shareholders for private companies. So if those employee options transfer to outside buyers, they potentially hit the 2K limit really fast. btw - Nearly this same set of circumstances forced the FB IPO. Dozens of early employees were allowed to sell their shares pre-IPO, triggering the max private shareholder rule.
- WatchDog 4y ago
  Dumb question, but does another company count as a single shareholder? Could you setup some kind of SPAC that only owns shares in the given company, to open up another 1,999 shareholders?
  - caseysoftware 4y ago
    Not a dumb question at all. Many angel investors will create pool their money to create an LLC to hold their shares so there's only one investor. It also makes it easier when you need to get "all the investors" to sign off on something. You have ONE signature to get instead of the N angels involved.
- bcrosby95 4y ago
  IIRC there's no limit, it just triggers a lot of the same compliance regulations as being public.
sillysaurusx 4y ago
Could anyone translate this into “The early employees will get wealthy from this” or “they’ll get slightly more than they would’ve gotten from getting a job at BigCo over 4 years”? My problem with equity grants is that everyone treats them like they’re so valuable, when in fact the EV is usually close to zero. That wouldn’t be so bad if the upside was really good, but dealing with nonsense like this makes them even less attractive. The whole point of working at a startup — of working very hard, instead of coasting — is to increase your standing in life. Some people care about skill set (you learn a lot more in a startup) but you end up a lot more stressed. Stripe’s early employees are in the best possible scenario, short of winning the lottery: they joined a unicorn early. If they don’t come out of it with lots of after-tax cash, then that calls into question why to even work at one. Unless you really love hard work without proportional reward, logically you wouldn’t choose that path — pg said as much in many of his essays.
- zamnos 4y ago
  couldn't some of them have cashed out with the Shopify thing? https://finbold.com/shopify-reportedly-buys-over-350-million-stake-in-payment-giant-stripe/ https://finbold.com/shopify-reportedly-buys-over-350-million...
- vorpalhex 4y ago
  There are a whole bunch of conditionals here. If you excised your options as soon as you could (and constantly paid small amounts) then you own a good amount of shares.. but don't have anyone to sell to. I have heard that the average equity grant is ~40k of value. I suspect the median is in a very weird place towards the low end though, if that number is true to begin with. Options are complicated and timing is crucial. They carry real and meaningful risk.
  - alasdair_ 4y ago
    >I have heard that the average equity grant is ~40k of value. levels.fyi is pretty accurate. A staff engineer at Stripe gets around 260k base, 55k bonus and 360k in stock per year. I strongly doubt 40k is the average - $200k RSUs a year seems a lot more likely (unless they count commission-only sales people in the average, which would be weird).
hardware2win 4y ago
>f you exercise, you have to pay the gain. For early employees, this could/would be a massive bill -- probably well into the 7-8 digit range for some early hires. Why is this relevant. Wouldnt they still be ahead?
- ConcernedCoder 4y ago
  > Wouldnt they still be ahead? on paper, yes, you'd be ahead, but owning stock doesn't equate to cash, you'd have to liquidate by selling... in the interim, you'd still owe the tax bill, even though you haven't sold yet, and for some without the means to pay that bill, it can be a problem.
  - hardware2win 4y ago
    Cannot you receive stock and sell it on the next day?
    - kgwgk 4y ago
      If you received stripe shares today how would you sell then tomorrow? Essentially the company is going to intermediate that sale by selling shares to external investors and buying shares from you.
    - s1artibartfast 4y ago
      No, the stock cannot be sold until stripe has an IPO. This is the bind employees are in. Together they have a 3.5 billion tax bill, but don't have the cash to pay it and cant sell the stock. It is like if I gave you a magic bean worth 1 billion this year, but the only magic bean buyer will come to town next year (hopefully). how will you pay your taxes.
      - tetranoir 4y ago
        Not entirely true. There's a grey area where you can sell futures of your own stock on the secondary market that can avoid requiring board approval.
rattray 4y ago
> to make sure early employees don't get rich before the IPO Former stripe employee here. This is not the case - early employees have been able to cash out on favorable (or at least reasonable) terms. Some limits, not perfect, etc, but I don't think that part of the narrative applies in this case.
deleted 4y ago
[deleted]
gadders 4y ago
>>Stripe and many companies have these transfer "veto right" to make sure they can control their ownership ("cap table") and also to make sure early employees don't get rich before the IPO. The founders are rich though, right? What a douche move.

paxys 4y ago

> This is my best guess-- I am not familiar with the Stripe's situation. All of what you said is literally the content of the article.

noahmbarr 4y ago
Other people asked a bunch of q's so I tried to present it a little differently Key concepts that were net-new from the article: * 10 year concept IRS restriction * Concept of a transfer Block essentially requiring a company sponsored secondary * Idea that Stripe could stay out of it, and just allow (partially) transfer waiver to 3rd party investor * The concept of most startups strong preference against creating liquid wealth events for early employees prior to IPO Perhaps you knew all of this, but the other commenters didn't seem to have this knowledge top of mind.

Swizec 4y ago

> to make sure early employees don't get rich before the IPO But why? What's wrong with early people getting wealthy?

dboreham 4y ago
Getting wealthy before VCs isn't good.
- mrexroad 4y ago
  Gotta keep those workers hungry!
  - nlitened 4y ago
    Will somebody please think of the poor workers with 500k salaries?
deleted 4y ago
[deleted]
rodgerd 4y ago
They're the wrong sort of people.
deleted 4y ago
[deleted]
akamia 4y ago
The concern could be a brain drain. If lots of your early employees cash out and leave, you are potentially losing a lot of historical knowledge and expertise at a time when you are trying to build up to a successful IPO. Early employees often leave after an IPO. At that time, it is still disruptive but the company's priorities have changed.
- Analemma_ 4y ago
  It's difficult to sympathize with Stripe when these options coming up on the ten-year mark, especially because we all know the reason it has been taking so long is that they would really like to just raise private capital forever instead of giving these employees their due.

throw3823423 4y ago

It's pretty accurate: Employees don't have a few million in change, each, to turn the RSUs into plain stock. I don't think the issue is making employees wealthy or not: It's 10 year old RSUs, so most of them are owned by former employees. But consider the size: If the tax bill is 3.5B, the full size of the grants we are talking about here is over 10B! last valuations in the press are at something like 60b. So 1 in 6 shares in the secondary market? Might as well be an actual IPO. Without 2022 going the way it did, I'd have expected that there would have been yet another regular round, where the investors ate enough common stock for current and former employees to vest the RSUs. That, or maybe the company really IPOs, which clears out all the comp problems. But Stripe finds it very valuable to keep the company closed, so instead of IPOing when everyone else does, they delayed too much. So there's no real need for not wanting people to get rich here: It's just a very uncomfortable amount of stock to have to turn into liquidity either way.

morepork 4y ago
I wonder whether there could be space here for a bank to come in and specialise in loans to cover the tax bill, using the currently pre-IPO stock as security
- kodah 4y ago
  Pre-IPO stock is about as secure as super glue based on toothpicks and bubblegum.
- MajimasEyepatch 4y ago
  Some companies are doing that, like https://vested.co/ https://vested.co/.
  - zamnos 4y ago
    http://getquid.com http://getquid.com http://secfi.com http://secfi.com
- renewiltord 4y ago
  That's literally what the Bolt CEO did. He ran a company that offered his employees the loans.

choppaface 4y ago

Some start-ups will both help employees exercise 83b as well as even bonus them the amount to cover the strike. Then if an employee leaves, the non-vested shares are clawed back and the bonus is not returned. If Stripe did this, wouldn’t they have avoided much of the tax issues here? It seems they’re only able to raise in this case because of their strong valuation and success. Like, most companies either could not do this, or would only do it for the founders. Moreover, what about performance-based comp for employees instead of time-vested ISOs? For example, employee gets percentage X at different valuation targets where these is liquidity? The ISO basically prohibits employees from having shareholder voting power where they work. Perf-based comp could perhaps offer employees the same fraction of a percent of any windfall while simplifying the tax / equity risks, which are very outsized for employees who are not accredited investors.

acjohnson55 4y ago
Yeah, but they would have had to have spent a lot more cash upfront, both in the bonus amounts and the payroll taxes on those amounts. ISOs are pretty ideal for early stage companies because they are very cash efficient and very light on taxes pre-liquidity. They begin to get more complicated when the company has non-negligible value. But they're still alright as long as you don't get to the point where the options are expiring without liquidity. The real question is why has Stripe allowed this to happen? I'm not sure what you mean with the performance-based comp to comment on that idea.
- choppaface 4y ago
  While it's true that cover-to-exercise is more cash-intensive, if it's only for the first 50 or so employees, it would seem viable for a company like Stripe that has strong cash flow. The problem with ISOs is they effectively halve the value of the award due to taxes, and furthermore can impose extremely risky tax situations on people who can't afford to lose much (e.g. employees who exercise before IPO). Performance-based comp could follow the public CEO comp model where the percentage of the package vests as a function of share price and/or milestones like liquidity events. Usually the milestones are also KPI-related, but ignore that for a moment. The packages could be RSUs and/or cash. This way the employees don't have to deal with the risk of options, and the company doesn't have to vest shares until they're actually worth something and taxes can be paid. Not sure how the package could survive after termination. It could end up being regulated the same way AMT was introduced but ... the reason ISOs exist is tradition, not because modern tax risks. Should be open for disruption / competition.

dataflow 4y ago

> guessing Stripe has a blocking right on stock transfers Often there's right of first refusal, but blocking rights? Do they actually have that? Is this common? If so, (why) would they need right of first refusal?

rpearl 4y ago
At least some companies have board approval of transfers. Less common but not exactly weird
samclearman 4y ago
Yes, it's common. They'll say that it's because they don't want unapproved investors on their cap table, which I guess is reasonable, but obviously the main reason is "because they can".
tetranoir 4y ago
It's supposed to prevent hostile takeovers.

orangepurple 4y ago

Can you work out a payment plan with the IRS for such a massive bill?

theIV 4y ago
As far as I'm aware, yes. I believe the IRS would much rather get money than no money. Note: I'm about to try this myself (though far less massive).

cyanydeez 4y ago

Why do people act like the tax's is greater than the cash flow, like it's some unthinkable crime to pay tax.

samclearman 4y ago
In this case, the way it works is: 1. You exercise your options, for a paper gain of millions of dollars 2. However, you can't actually sell the shares (there are likely contractual restrictions on selling them, and even if not, there's not a liquid market) 3. So you have to pay millions of dollars of taxes even though your cash flow is zero. And before you say "but they're ISOs", there's no such thing as ISO's under AMT so it doesn't help at all.
- chii 4y ago
  > for a paper gain of millions of dollars which is why this part should never have been taxed. Until there's a sale of those shares, the price is merely an estimate and thus is not and should not be considered the FMV.
  - samclearman 4y ago
    Not sure what you mean by "should" here, but the IRS definitely considers it to be a gain that you have to pay taxes on, regardless of whether you can sell the shares.
    - zamnos 4y ago
      Yes that's exactly the problem. Why does it seem okay for the IRS to demand a million dollars from someone who has no way to pay that? Like, doesn't that seem like something is wrong/broken somewhere? There's a cottage industry of loan sharks who will lend people money so they can pay, but how about instead the IRS not take money from people who don't yet, and may not ever, actually have the money to pay, until they, y'know, have the ability to pay off that tax bill.
    - Keyframe 4y ago

matchagaucho 4y ago

IIRC there's still a limit of 2,000 shareholders for private companies. So if those employee options transfer to outside buyers, they potentially hit the 2K limit really fast. btw - Nearly this same set of circumstances forced the FB IPO. Dozens of early employees were allowed to sell their shares pre-IPO, triggering the max private shareholder rule.

WatchDog 4y ago
Dumb question, but does another company count as a single shareholder? Could you setup some kind of SPAC that only owns shares in the given company, to open up another 1,999 shareholders?
- caseysoftware 4y ago
  Not a dumb question at all. Many angel investors will create pool their money to create an LLC to hold their shares so there's only one investor. It also makes it easier when you need to get "all the investors" to sign off on something. You have ONE signature to get instead of the N angels involved.
bcrosby95 4y ago
IIRC there's no limit, it just triggers a lot of the same compliance regulations as being public.

sillysaurusx 4y ago

Could anyone translate this into “The early employees will get wealthy from this” or “they’ll get slightly more than they would’ve gotten from getting a job at BigCo over 4 years”? My problem with equity grants is that everyone treats them like they’re so valuable, when in fact the EV is usually close to zero. That wouldn’t be so bad if the upside was really good, but dealing with nonsense like this makes them even less attractive. The whole point of working at a startup — of working very hard, instead of coasting — is to increase your standing in life. Some people care about skill set (you learn a lot more in a startup) but you end up a lot more stressed. Stripe’s early employees are in the best possible scenario, short of winning the lottery: they joined a unicorn early. If they don’t come out of it with lots of after-tax cash, then that calls into question why to even work at one. Unless you really love hard work without proportional reward, logically you wouldn’t choose that path — pg said as much in many of his essays.

zamnos 4y ago
couldn't some of them have cashed out with the Shopify thing? https://finbold.com/shopify-reportedly-buys-over-350-million-stake-in-payment-giant-stripe/ https://finbold.com/shopify-reportedly-buys-over-350-million...
vorpalhex 4y ago
There are a whole bunch of conditionals here. If you excised your options as soon as you could (and constantly paid small amounts) then you own a good amount of shares.. but don't have anyone to sell to. I have heard that the average equity grant is ~40k of value. I suspect the median is in a very weird place towards the low end though, if that number is true to begin with. Options are complicated and timing is crucial. They carry real and meaningful risk.
- alasdair_ 4y ago
  >I have heard that the average equity grant is ~40k of value. levels.fyi is pretty accurate. A staff engineer at Stripe gets around 260k base, 55k bonus and 360k in stock per year. I strongly doubt 40k is the average - $200k RSUs a year seems a lot more likely (unless they count commission-only sales people in the average, which would be weird).

hardware2win 4y ago

>f you exercise, you have to pay the gain. For early employees, this could/would be a massive bill -- probably well into the 7-8 digit range for some early hires. Why is this relevant. Wouldnt they still be ahead?

ConcernedCoder 4y ago
> Wouldnt they still be ahead? on paper, yes, you'd be ahead, but owning stock doesn't equate to cash, you'd have to liquidate by selling... in the interim, you'd still owe the tax bill, even though you haven't sold yet, and for some without the means to pay that bill, it can be a problem.
- hardware2win 4y ago
  Cannot you receive stock and sell it on the next day?
  - kgwgk 4y ago
    If you received stripe shares today how would you sell then tomorrow? Essentially the company is going to intermediate that sale by selling shares to external investors and buying shares from you.
  - s1artibartfast 4y ago
    No, the stock cannot be sold until stripe has an IPO. This is the bind employees are in. Together they have a 3.5 billion tax bill, but don't have the cash to pay it and cant sell the stock. It is like if I gave you a magic bean worth 1 billion this year, but the only magic bean buyer will come to town next year (hopefully). how will you pay your taxes.
    - tetranoir 4y ago
      Not entirely true. There's a grey area where you can sell futures of your own stock on the secondary market that can avoid requiring board approval.

rattray 4y ago

> to make sure early employees don't get rich before the IPO Former stripe employee here. This is not the case - early employees have been able to cash out on favorable (or at least reasonable) terms. Some limits, not perfect, etc, but I don't think that part of the narrative applies in this case.

deleted 4y ago

[deleted]

gadders 4y ago

>>Stripe and many companies have these transfer "veto right" to make sure they can control their ownership ("cap table") and also to make sure early employees don't get rich before the IPO. The founders are rich though, right? What a douche move.