Comment by cletus | Hacker News Reader

Comment by cletus | Hacker News Reader

So we need to split this issue between companies that are public (or otherwise have liquid equity) and those that don't.

For the big companies it's pretty easy. They're largely RSU based. Shares are vested/released. Many companies allow full autosale. Easy. Even in the case of selling enough shares to cover withholding your still left with something very liquid.

Options in public companies are in basically the same boat.

The tricky one is early stages startups.

If you have options that have an exercise price at or over market value then you can take a Rule 83(b) election to defer your entire tax liability til exercise.

If the exercise price is below market then that would mean paying tax on the entire grant even though you may never receive it. Easier option for founders than employees.

Either way it doesn't cover grants along the way.

I do think it's a reasonable complaint to get taxed on something you can't liquidate.

So two things jump out at me:

1. Issuing RSUs in a non-public company send like a bad idea. Does anyone actually do this?

2. The vast majority of tax revenue would come from FAMGA shares which are already taxed so what's actually going to be gained by this? Or is executive compensation (ie ISOs) able to get favorable treatment already? This reason sooner makes it seem like a bad idea.

EDIT: an answer to my own question (emphasis added):

https://www.recode.net/2017/11/12/16640530/uber-peace-deal-r...

> Under terms of the deal agreed on, those eligible employees with stock options are capped at selling half their holdings (and those with restricted stock units cannot sell in this round).

So apparently some Uber employees have RSUs and Uber obiously public or liquid.

> I do think it's a reasonable complaint to get taxed on something you can't liquidate.

One way to sidestep this would be to force the taxing authority to take some of the options as payment, rather than cash. You've been granted 100 options at a value of $x each and the tax rate is 20%? Just give them 20 options. That way it doesn't matter what x is or whether the market is liquid!

This is the perfect solution if they really want to tax illiquid assets.

But who would manage this federal portfolio?

Ah, the "beauty" of the US Federal tax system is that the answer is the same as everything else in the system: You. With You being liable for back interest and penalties if You screw it up. Basically the result would be an earmarking system, payable on exercise again, as opposed to time of receiving option.

That said, in the broad scheme of things it still seems workable. Startups may have to get used to also providing assistance with taxes for their initial employees. Honestly that's already not a bad idea even in the current environment.

The US is an anomaly among developed countries for having a tax system that is so heavily individualistic. Plenty of other countries give tax-preparation duties to companies or the government, so individuals are mostly covered by blanket forms. The US doesn't do this because H&R Block and TurboTax would get put out of business.

So there's no real reason that we couldn't have a more elegant and streamlined process, but you're right, we won't.

The IRS would just immediately liquidate the options on the open market. Oh, there is no liquid market! So if the IRS can't do it why should individual startup employees be required to do it?

If the IRS are going to say that 100 options are worth $100x and charge tax based on that then they should be willing to accept 20 options in lieu of $20x.

So much this! If they seize a boat for non tax payments, they can auction it; it would be interesting if there were a secondary market of buying shares in startups at an IRS auction.

The fair market value of something is whatever you can sell it for, not what someone says it’s worth. Taxing something that can’t be converted to tangible value is just wrong. They are basically taxing potential and not reality. They are taxing the egg based on what the resulting chicken might be worth.

It's not like there's no precedent for this sort of thing. The Alaska Permanent Fund[0] is a fine example of a portfolio managed by a state-owned corporation that pays out to residents.

[0] https://en.wikipedia.org/wiki/Alaska_Permanent_Fund

Smart!

This suggestion might actually force some of the startups that play dubious games with stock values (not disclosing total # of shares issued and current values) and preferred shares and the like to be more above board. In a way getting taxed on these things would at least make it clear what their 'value' is.

> 1. Issuing RSUs in a non-public company send like a bad idea. Does anyone actually do this?

We offer stock grants (basically RSUs without a formal vesting schedule) to key employees at my firm and have had no issues. You say that there are issues with the vested stock not being liquid, but the issuing employer can simply offer to buy the shares back if needed at fair value if liquidity is needed, which we determine according to a formula which inputs the firm's balance sheet and trailing profitability.

This has the advantage of being very straight forward, both to the owners as the issuing party, and the employees -- but has the cost of being disadvantaged by the tax code.

Contemporary startup options packages are anything but that. Most of the time neither the employee receiving them nor the HR person explaining them has any idea how they really work -- but for all that opacity, they get a preferential tax treatment.

It's probably worth pointing out that the only reason startups rely so heavily on option compensation as opposed to simple equity grants are for the reasons above: they are tax advantaged, and the employees have no idea what they're getting. I wouldn't mind seeing the startup world return to a more easy to understand scheme.

isn't this already a problem for RSU's, where you get taxed at vest time (or on the value at vest time)? Are there startups out there granting illiquid RSU's? seems like a bad fit.

RSUs are taxed when vested and released. Vested but not released RSUs are not [yet] taxed.

Most companies issuing RSUs are doing so because there is a public market for them and so the release and vest date is the same.

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