San Francisco Doing Everything It Can To Drive Zynga And Twitter Away
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City hall and the Asian Art Museum are one block north. The opera, symphony and ballet are two blocks northwest. There are two high-rise, luxury condominium buildings directly across the street. Walk 10 minutes west, and you're smack in the middle of one of the city's up-and-coming neighborhoods (Hayes Valley), replete with boutique shopping, gourmet coffee stands and antique stores.
If offering Twitter a sweetheart lease on a gigantic building in a gentrifying urban neighborhood and giving them a tax break is enough to drive them away, then I sincerely wish Twitter luck in trying to retain their employees once they move to Brisbane. What've they got out there? A Taco Bell?
Muni wants to keep tax base and halo effect, but maybe also wants an extra cut of the upside. Startup wants to expand, but also establish a base of operations. Everyone wants something and has a backup threat just in case. The dance ensues.
SF has some interesting tax policies. I had a startup in SF lo so many years ago. Our total capitalization was $30K. We spent about $15K (on equipment and rent, no salaries) total before shutting down. A few months later SF City/County tried to collect a /$69K/ payroll tax bill based on... well, I never figured out what. I sent them a letter + documentation and never heard about it again.
For anyone who wants to move a company there, they don't have much amenities. They have a single chinese restaurant, una taqueuria, and have a stellar coffee shop, but its not open long enough for the hacker personality.
Brisbane is a small town that used to be lively during the days of Johnny Cash. Its not a substitute for a city like San Francisco or even a south bay area like Mountain View. Its that mountain town you see up in Tahoe, but 1 mile south of the city. I actually suggest making a daytrip to hike the abandoned railroads through it.
If they were to move into the open buildings in the area, this could make lives of people who use public transit annoyed. The Caltrain stations are 1 mile away on each side away from Brisbane, there is only a single SamTrans running along Bayshore and forget BART, its way too far. Biking is your best bet via caltrain.
Since Brisbane is an economical situation where they are talking about shutting down the elementary and highschools, this could be a very good thing for the city. As for Twitter and other companies alike, its a question about what type of culture they want to grow. As a resident of the area, I prefer living in Brisbane, rather than working.
You hear SF trying to ride the coattails of stratups everywhere. SF the 'heart of silicon valley', 'the epicenter of entrepreneurship', etc, etc. but on the other hand, it s as if they want to do as much as they can to drive job-growing business away and let SF just become the kitchen/dining room to silicon valley.
†This is of course, patently false. Oh sure, the storm was bigger and nastier, but if you do insist on building your city below sea level, then route crucial funds from the Army Corps of Engineers who are supposed to keep the levees strong, to some Blackwater dudes playing 'choose your own adventure' in the Middle East...
Let me help you, since you are being so pointedly blind to your own offensiveness. (Which only hurts your ability to be pithy and forceful, by the way.)
This is a conversation about tax breaks and municipalities, in this case, the subjects involve SF and some startups.
This particular thread was an aside about Australia, because of the name "Brisbane".
You derailed it into a micro-rant about a recent tragedy, and then threw in an even less relevant slam on the US.
I'm not the most popular person here on HN. I've gotten into it with Justin of Justin.tv before because I was calling out some of the more offensive startup hysteria/bullshit.
You are something else entirely. You're not an iconoclast.
You are the 25 year old whose parents died when he was 2 y/o and won't shut up about it at the bar.
Have yourself a coke, a smile, and shut the fuck up.
San Francisco is a pretty nice place to live. Sometimes you need to pay a little more for nicer things.
Also, unrelated question: How much harder is it for a 31-year-old to find work?
I'm not sure what age has to do with the question though? Either you have have marketable skills or you don't.
edit: After reading jackowood now I realize what the issue was, most places are up front about it and they look like really shitty places to work that are more concerned about saving $15/hour than figuring out how to make an extra $15/hour. They take a total labour mentality to programming instead of the view of code as a capital good with near-zero cost of reproduction. (aka, their idiots). I've never had a problem finding work in Vancouver and I'm 29 with no degree.
Vancouver is a great city, no question about it. I think San Francisco is bigger, more disgusting, more thrilling, and in my opinion uglier and more beautiful than Vancouver depending on where you're looking. Keep in mind that part of the reason for our homeless problem is that we're a magnet for the cast-offs of an entire nation with less of a support system than you have in Canada - it's not like San Francisco manufactures homeless people in some factory south of market and dumps them out on market street every morning. We're not purely innocent victims in all this, San Francisco has done plenty to earn that magnet status. Every now and then a mayors of some other city starts a kerfuffle by offering homeless people $50 and a one way bus ticket to SF (though SF actually used to bus its own over to Oakland).
I think a very well implemented national health care program can be a competitive advantage. The other things you mentioned seem less important to me, valuable at the margins, but not game changers in any way. It comes down to UBC vs (Stanford + UCSF + UC Berkeley). UBC is a wonderful university, don't get me wrong, but as long as the Bay Area has those three, it will be a huge player in high tech.
I would rethink that decision.
btw, the cloth BART seats pictured in that article are some of the cleanest I've seen. I ride BART every day. Most seats are collapsing, ripped, and filthy.
Furthermore, and I'm still figuring out the numbers on this one, I am curious to see what the sales tax losses (among others) will be when major companies like these move away from the city.
And really, it puts entrepreneurs in an awkward position of being forced to go to SF (because that's where all the talent want to be) and having to find a way to survive as well. San Francisco is definitely right to earn taxes on the many wealthy individuals that live in its borders, but I do think there is a more symbiotic relationship to be had.
I'll be sure to remember that every time the government raises taxes and pay up without asking any questions or being critical.
Does giving the government more money make the government more effective?
San Francisco residents live in the United States of America. The United States of America imposes federal taxes. Federal taxes have been used to fund wars and bailouts of various failed businesses.
Of course, no real city has the authority to have a military. The city does have a police force, which often acts in ways that do not better the lives of SF residents (parking tickets for example).
I just have a adverse reaction to arguments that claim I should appreciate a service provider that charges too much. Sorry, don't like getting ripped off.
> bailouts, wars, and other profiteering
> Sorry, don't like getting ripped off.
To be fair, Singapore does have a Ministry of Defence and an Army.
Now, it's late, so correct me if I'm wrong in my thinking here:
If twitter magically gained $3 billion in additional valuation, and all employees cashed in all their options, all at once, it would result in a "huge" tax bill of .... $13 million or so. Compare to the ~$270 million in capital gains taxes the employees would have racked up when they exercised their options.
Yeah, I think that Twitter could live just fine with that. Making a large and loud public fuss is cheaper, of course.
In light of all that, I think "huge" is a misleading word to use.
(Assumptions: a full 30% of the company as employee options; directly translating a higher valuation into the strike-vs-share price spread that's actually taxed.)
The difference between the two cases is that the employees are being taxed out of money they have (if they exercise and sell) whereas the company is being taxed based not on revenues but on the appreciation of its stock. So a company whose valuation shot up in advance of anticipated revenues could find itself with a bill it had no money to pay.
More generally, a company whose valuation shoots up but which is unable to find cash to meet shorter-term needs is Doing It Wrong and doesn't deserve the higher valuation.
Musing about this tax in general, without specifically debating:
I think payroll taxes of any form are one of the worst kinds of tax, so from that point of view we can agree. (Somehow I don't think you'd agree that significant increases on taxes for the wealthiest are a better alternative, though.)
But, if you're going to tax wage and salary compensation, then it's more than fair to tax options and other forms of compensation, too -- otherwise you end up with a regressive payroll tax, which punishes poorer workers & companies at the same time as being far less efficient at raising the needed revenue.
(edit: Part of my post was in response to something I hadn't noticed you'd edited out, so I snipped it belatedly.)
Why is no one suggesting applying the 1.5% when cash exchanges hands? Everyone is either suggesting keeping the 1.5% as is, or scrapping it completely for stock options. But surely a middle ground allows cash for taxes as a small percentage of cash from profits?
That's why in my imaginary example a post or two ago, one of the more fantastical & unlikely parts of it was a full 30% option pool all being exercised at once.
Hence, (and I apologize for any inaccuracies in paraphrase) the post you are replying to is recasting the tax as a potential cash-flow issue, rather than a great and unfair ongoing burden: because it's not.
Separately, I do not think the tax is unfair. Tax has to come from somewhere, and if SF can show a nicer environment for employees and founders to live in, then they can charge a higher price for the environment. Tax competition takes care of testing whether this is a wise decision, and there is plenty of tax competition in the region surrounding SF.
To me, tax becomes unfair if it is arbitrarily applied to some people, but not to others, e.g. letting Twitter and Zynga off, while taxing other start-ups.
Well, that would explain a bit of the whining, but I will need a nice solid citation before I believe a word of it.
First, because I cannot fathom how it could possibly work: What's a qualifying "valuation event"? What if another event comes along and the valuation has dropped -- is the company entitled to a refund, then?
Second, because that would be the only tax scheme I've ever heard of, except maybe some proposed & hair-brained wealth taxes, that directly taxes unrealized gains. (Wealth taxes I'm aware of that actually exist tax unrealized gains under simple growth assumptions, not based on any sort of actual valuation.)
Third, because if that were the case you'd think that the vocal opposition would be able to articulate it more clearly.
> To me, tax becomes unfair if it is arbitrarily applied to some people, but not to others, e.g. letting Twitter and Zynga off, while taxing other start-ups.
Exactly the problem that the options tax was introduced to solve, as well. If there is a tax on employee compensation, why shouldn't the executive compensation of $1 salary + $300 million in options be taxed at the same effective rate as the janitor's wages?
(N.b.: I think a payroll tax is dumb, but a regressive payroll tax is dumber!)
(Edited a bit for clarity & removed a side comment.)
Why should a company with lots of tax gains not have to pay the same taxes on them as the company next door? Certainly they were familiar with the tax code and its consequences when they set up shop in that city.
The whole article reads me as simply "big successful company wants to avoid paying taxes."
http://news.ycombinator.com/item?id=2331182
the problem that the companies the law applies to aren't necessarily rich; they're not being taxed on their revenues, but on their valuations, which reflect investors' hopes about their future revenues. So they're effectively being asked now for money they don't have yet.
But in any case it would not be "special treatment" to exempt them; this is one of those laws that is so weird (zero other cities have it that I know of) that the only reason it has stayed on the books is that it has not actually been enforced in the past.
Second, most events that would cause such a huge rise in valuation are accompanied by a huge influx of cash. There may be some tiny edge cases, but a gangbusters IPO ain't one. The bill is due once a year, and imagining a company being without the cash for it stretches my imagination to the breaking point.
Third, "being asked now for money they don't have yet" is the entire reason the company is selling equity in the first place. They can surely budget for an extra 0.015 of an already proportionally tiny amount.
Fourth, they aren't taxed on valuations but on, to coin a term, their employees' realized compensation. This may be based on valuation, but justifiably so, since compensation is compensation.
Hell, a company with bottomless greed and a deep commitment to nickle & diming could probably find a way write the tax bill into their options contracts.
Fifth, the weird part of the law is that it is structured as a payroll tax rather than as an income, capital gains, or wealth tax.
Otherwise it appears to be a very honest attempt to fairly tax different forms of compensation in a non-regressive way.
I faintly recall a discussion of when you should accept dilution (which a tax is) if it raises your chances of success. I tend to assume that startups locate in SF rather than the non-SF bay area for reasons that they feel give them more than a 1.5%*employee equity higher chance of success (shorter commutes for your people, etc.).
More generally, it's only going to be the very large companies that want to exercise their option of exit for this reason: moving sucks and nobody wants to do it. By the time it's millions of dollars in taxes (i.e. valuation > $1bn or so) you'd think about it, but I'd guess not before. So it's not the greatest idea from a tax equity perspective: a tax only the extremely wealthy find it worth their while to dodge is still regressive. Lame capitulations to keep the few companies with this high-class problem in the city are probably correct from a utility-maximizing perspective, if kind of morally distasteful.
By the way, anyone who's been seriously thinking about opening an office in SF should try to lock in lease terms this week. See http://www.scribd.com/doc/50842673/101155-economic-impact-fi...
Why Twitter and Zynga might be more deserving than a non tech company is because of the relatively high salaries of their staff. This extra disposable income flows up and down to the rest of the city.
Look at it this way. You run a dry cleaning business. These are your choices:
Your city can give Twitter a tax break to open shop near you (the same city). This will hopefully bring you new customers and help your business. This can work very indirectly. Twitter Employee >> Diner Waitress >> You.
Or
Your city can give you a tax break, but not one to Twitter. Twitter goes to a different city (because you can always find someplace that has lower taxes). Now neither you nor the diner have new customers. In theory, the tax break that you get ends up being less money than the extra money you would have made had Twitter opened shop.
SF isn't being competitive with the surrounding towns.
Maybe, but what you're saying is politicians are more interested in the politics in and of itself than really serving the citizens. They should do what they think will benefit the majority of the citizenry with disregard what it will do to their political 'career'.
One other pet peeve I have with the city is its requirement that construction jobs must include a large percentage of city residents. This is a city which prides itself in being open and welcoming of the whole gamut of locals and all immigrant types. How does that reconcile?
What if San Mateo county got the itch and said, you know what, anyone not from San Mateo working in San Mateo will be levied a non-resident payroll tax.
a) Not more deserving, but most companies in the city don't have to deal with the secondary tax mentioned. The 1.5 payroll taxes on gains from stock options is aimed at high-growth / go-public companies.
b) The article is asking why do this to ANY company in the city. Even in small biz an additional 1.5% in regular payroll taxes hurts.
</sarcasm>
</sarcasm>
Now I understand that big companies try to pretend otherwise, so that they can scare the city and save these 1.5% for themselves, but don't take this for anything other than BS.
The example I remember was that if a company raised a bunch of money at a ~$1B valuation but was later acquired for a significantly smaller sum, they would have already paid taxes on their employees' stock option gains at the ~$1B valuation based on the increase in perceived value of their shares at the time they raised money.
Edit: what I said above is in line with what pg said in his comments here:
The difference between the two cases is that the employees are being taxed out of money they have (if they exercise and sell) whereas the company is being taxed based not on revenues but on the appreciation of its stock. So a company whose valuation shot up in advance of anticipated revenues could find itself with a bill it had no money to pay.
I'm pretty sure Twitter wouldn't be twitter if they weren't in SF.
And this is what's scares me about this whole "bubble 2.0" thing. People (investors) are getting too greedy, they rather move an entire company, including reallocation of it's employees than to pay a fraction of their $xxB evaluation.
I don't give a damn about the investors, they knew where this companies was located. If they aren't informed before their investment, this just shows how much they know about their own country and cities.
Besides, you have no idea how much tax europeans startups have to pay, If there was a place like SF in Europe, I would be moving there tomorrow morning.
And finally, we are talking about Twitter. Have they finally got a way of making any real money ? Or this company based only on paper money ?
Being able to work in the city is a huge draw. Just ask the many people who live in SF and commute down to Stanford, Google, or elsewhere in the South Bay.
We also have an office in NYC -- also not cheap, but totally worth it. Between NYC and SF we have no trouble recruiting employees who want to live in a desirable location (and we, the officers, want to live here too!), and nearly all of our partners and business contacts are either in SF or NYC, too.
I assume theres a source for this somewhere?
I can't. That doesn't mean Arrington is right, but I can't think of a reason to doubt that statement.
And I know I've heard that many of the financial companies have moved out of the city or downsized operations here during that span in order to avoid the high cost of living and tax rates.
Newsom had always focused on developing and growing high tech companies in SF to increase jobs and revenue for the city. On the other hand, certain members of the Board strongly believe in taxing our way out of the deficit. As a startup founder in SF, it's sad that I may one day have to deal with this.
I mean, would the tax really hurt Twitter or Zynga? This stuff is just kind of disheartening. Oh no, your multi-billion dollar massive success of a company might lose a couple mil to taxes, better throw a fit or pack up and move to a new city.
Let's say you were going to lease storage (physical) and outfit A had a flat fee of 50/mo. Outfit B had a flat fee of 70/mo plus appreciation on the goods you stored. Let's say 20/mo difference had negligible impact on your disposable income. Who would you choose?
If you have a choice, why choose the costliest one?
One day people will get that there is far more to 'value' than 'money'. SF is a nice place. People want to be there. Why shouldn't they capitalise on it? Boo-hoo, stupidly wealthy company can't take the heat, so go move to Idaho and see if that tax is really the kind of thing that cripples your tech company.
Rah, rah, private companies should be allowed to accrete wealth for their superior products because that's The American Way. But should a city offer a superior product, suddenly we're all supposed to be communist equalists when it comes to the public life?
Exactly. I could count on two hands the number of places I'd be willing to live (unless you were paying me truly obscene amounts of money and doing incredibly interesting work). Proper cities with good public transport and fun things going on. In a country where I speak at least a bit of the language.
Quality of life is not something to be ignored; requiring employees to live elsewhere or make long commutes is a big deal. When you're a startup looking for younger employees and fostering that kind of culture, location is vitally important.
It's not just City versus Company. Your employees are a factor in this, and employee decisions are based on lots of different variables.
Employees are the most perishable resource a company has. If my company told me they were moving my downtown Chicago office to the suburbs, I would start looking for a new job. I'd wager that half to 2/3rds of my office would not like an office move either, primarily because of the increase in commuting time and cost. (Hell, I would have to buy a car!)
Twitter and Zygna have an enormous investment in the talent of their employees. Many of them are likely to prefer working in SF rather than Brisbane. So they may play hardball with the City, but I'll bet they ultimately do what their employees want them to do.
Just sayin; ain't sayin it's so.
This is not really about the tax, though. The city is not so much fixated on taxing anyone's options, as it is using the exemption to make it worth Twitter's while to stay in the city. Taxes are lower in Brisbane, but rents are higher because the building on offer there is newer. Over 6 years, Twitter stands to save ~$15 million by staying in the SF Mart building, notwithstanding the higher initial refurbishment costs.
Competing jurisdictions is a check on corruption.
3-4 up-votes in the first 10-15 minutes of submission is going to get your story in the middle of the front page. It only sucks that TechCrunch is popular here, IMO.
* centrally located to SF, SJ, and the rest of the Easy Bay.
* cheaper than SF or SJ (unless you live in the Hills)
* an international airport.
* an international shipping port.
* convenient BART access from SF and the East Bay
* not far from UC Berkeley.
* (somewhat) cleaner than SF.
I'm really frustrated right now, for several reasons.
One, I know that a portion of the articles I'm scouting around for are being shoved aside to make way for these techno-celebrity gossip columns. Only so many articles can get in the top 40-50, and I only have so much time in a day.
Two, I clicked on it. Which means Tech Crunch is correct in their assessment of my interests and certain keywords that instinctively drive my click impulses.