- It takes a "market based" allocation strategy which allows "cash bonuses and similar compensation" to be included. This is a joke.
Honest question, why is this a joke?
Honest question, why is this a joke?
a) you're not certain to get anyway (because they're bonuses)
b) might not really be worth $30k
The IRS uses 409A valuation. These valuations have been high enough to cause huge AMT burden to engineers. Sam Altman etc have written about it; Zoe Lofgren herself has been trying for years to fix it.
Why do you think it is a joke?
And for Engineers and Designers it's even harder.
It is very wrong to treat employees as investors when they're invariably taking major income hits to be there.
The people who get screwed are early employees, who join and get options when shares are not worth a lot but non-zero. Then your choices are front the cash to early exercise (if the company even allows that) and 83b what are probably going to be worthless shares or wait until later and find that the shares are worth a lot now but still illiquid (and risky!) and the AMT hit of exercising is enormous.
"Fair market value is zero, so an 83b is free." Okkkaayyyy...
Some scenarios: A company's "real" fair market value is $50 and this is also what they report to the IRS. They issue options with a strike price of $60, which are $10 out-of-the-money. This is an allowed transaction.
B) The FMV reported to the IRS is $40 but the "real" FMV is $50. Options are issued with a strike price of $50. The IRS thinks that these options are $10 out of the money and therefore allowed, but they should actually have been taxed more-or-less as income.
C) The FMV reported to the IRS is $60 but the "real" FMV is $50. Options are issued with a strike price of $65. The IRS is happy that these options are out of the money, which they really are. If the IRS audits and challenges the valuation, they may come up with a price closer to $50 but that only means that too much tax might have been paid which they're not going to be too upset about. Meanwhile, for the purposes of reporting compensation of their prospective H1B staff member, the barely out of the money options look a lot better than they should.
The IRS is set up to look for B, no-one looks out for C.
I would accept 409A as a reasonable assessment of a company's value, but that's somewhat different than an assessment of what compensation an H1-B worker is getting.
The PDF linked by OP said "including cash bonuses and similar compensation", and the knee-jerk reaction was "it is a joke". Furthermore, it was explainted that "the value of private company stock can be hard to determine". I pointed out the 409A valuation as a response to this.
I do not know if equity will be counted against income.
But I think it is reasonable to count vested and exercised equity into the pay calculation. After all, IRS uses that to determine taxes.