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Comment by choppaface | Hacker News Reader

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.

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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.

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.

RSUs are less tax efficient because they are considered ordinary income, marked to market, at the time they vest. ISOs, on the other hand, are subject to moer advantageous capital gains, and there's more control over when taxes will be realized.

The downsides of ISOs are: - They cost money out of pocket to exercise. - They have to expire within 90 days of separation from the company. - They get complicated when you can't simply early exercise+83b them.

As I said earlier, I think RSUs are ultimately probably better after the exercise cost becomes non-negligble. But ISOs have their perks under the current tax code.

Ultimately, I think the IRS should scrap the ISO. Just let employers award stock with a cash basis at vest time and gains realized at the point of liquidity. It would be much simpler for everyone to deal with.

> The problem with ISOs is they effectively halve the value of the award due to taxes

Could you explain this?

Federal + California tax on those kinds of amounts totals 43%, which is easier to estimate in your head if you call it 50% after taxes.

An 83(b) election is only useful if the value of the shares is low. The income tax is negligible and the capital gains tax is zero. The price of many RSUs was not low when they were granted, so the income tax bill would have still been higher than many could pay.

Edit: Also, RSUs are not eligible for 83(b) elections.

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