4 ms·

This is intentional. I believe that secondary markets are usually bad, and always distracting. I'm not opposed to pre-exit liquidity, but a secondary market t

by sama 13y ago

This is intentional. I believe that secondary markets are usually bad, and always distracting. I'm not opposed to pre-exit liquidity, but a secondary market that the company does not oversee causes huge issues. Most companies now prevent this. Your point about ISOs expiring is reasonable--I think a lot of companies are using RSUs partly for this reason.

jorgeortiz85 13y ago
I understand it's intentional. What your original post made me realize is that transfer restrictions have become standard terms. More people should understand what that means. Secondary markets have issues, but so do secondary offerings overseen by the company. There can be pretty big principal-agent problems, both around price and around timing. I'm less familiar with the traps and pitfalls of RSUs, but in general they seem fairer than ISOs. I hope they're used more widely.
fizx 13y ago
It benefits no one to have employees sitting around vesting because they can't pay their taxes to leave, hence RSUs have become more popular. I'm more interested in the emergence of derivatives markets against RSUs. It's started already, and I wonder if companies are going to attempt to put that cat back in the bag, or just ignore it as it largely doesn't affect them.
paulsutter 13y ago
Could you expand on be "huge issues" caused by secondary sales? I'm having trouble thinking of any. The most common criticism I've heard is that secondary sales can make it difficult for the company to maintain a fiction about their common share price, but that amounts to a tax dodge anyway. Love to hear some concrete thoughts on the matter.
- kogir 13y ago
  A good example would be 409A valuations[1], which set the price at which options can be granted. Sale of employee stock on a secondary market can dramatically raise the price at which the company has to grant future options, making it harder to hire, and hurting future employees. While this might be ok in open markets with real competition, it's possible (and in fact common) for common stock in trending companies to be overvalued on secondary markets. [1] http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_409A http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_4...
- andrewfong 13y ago
  I can't speak for Sam, but two other issues in addition to tax and valuation are explicitly mentioned in the term sheet: (1) Public reporting: Once the market for secondary sales gets to a certain point, the company is essentially public. As such, it has to register with the SEC and publicly disclose a whole bunch of information it'd rather not. This used to be triggered by having over 500 shareholders, although I believe the number has recently changed. (2) Competitors: Stockholders have certain statutory information rights. Although you can limit those rights contractually, as a general matter, you don't want your competitors owning shares.
beagle3 13y ago
But RSUs are taxed at grant, aren't they? While there's no tax surprise later on, a company like Facebook can't offer a new employee "an RSU now worth $400K" vesting over 4 years, without triggering over $100K in taxes that second. Or am I misunderstanding how RSUs are taxed?

by sama 13y ago

jorgeortiz85 13y ago

I understand it's intentional. What your original post made me realize is that transfer restrictions have become standard terms. More people should understand what that means. Secondary markets have issues, but so do secondary offerings overseen by the company. There can be pretty big principal-agent problems, both around price and around timing. I'm less familiar with the traps and pitfalls of RSUs, but in general they seem fairer than ISOs. I hope they're used more widely.

fizx 13y ago

It benefits no one to have employees sitting around vesting because they can't pay their taxes to leave, hence RSUs have become more popular. I'm more interested in the emergence of derivatives markets against RSUs. It's started already, and I wonder if companies are going to attempt to put that cat back in the bag, or just ignore it as it largely doesn't affect them.

paulsutter 13y ago

Could you expand on be "huge issues" caused by secondary sales? I'm having trouble thinking of any. The most common criticism I've heard is that secondary sales can make it difficult for the company to maintain a fiction about their common share price, but that amounts to a tax dodge anyway. Love to hear some concrete thoughts on the matter.

kogir 13y ago
A good example would be 409A valuations[1], which set the price at which options can be granted. Sale of employee stock on a secondary market can dramatically raise the price at which the company has to grant future options, making it harder to hire, and hurting future employees. While this might be ok in open markets with real competition, it's possible (and in fact common) for common stock in trending companies to be overvalued on secondary markets. [1] http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_409A http://en.wikipedia.org/wiki/Internal_Revenue_Code_section_4...
andrewfong 13y ago
I can't speak for Sam, but two other issues in addition to tax and valuation are explicitly mentioned in the term sheet: (1) Public reporting: Once the market for secondary sales gets to a certain point, the company is essentially public. As such, it has to register with the SEC and publicly disclose a whole bunch of information it'd rather not. This used to be triggered by having over 500 shareholders, although I believe the number has recently changed. (2) Competitors: Stockholders have certain statutory information rights. Although you can limit those rights contractually, as a general matter, you don't want your competitors owning shares.

beagle3 13y ago

But RSUs are taxed at grant, aren't they? While there's no tax surprise later on, a company like Facebook can't offer a new employee "an RSU now worth $400K" vesting over 4 years, without triggering over $100K in taxes that second. Or am I misunderstanding how RSUs are taxed?