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Comment by fuelfive | Hacker News Reader

The tax liability thing could be real. Has the company received a valuation in the time since you started working? Let's say that you took a series A with a 5M post-money valuation. Then, your 1% would show up on your tax returns as $50,000 of income. What I would do is ask the company to take the tax hit on my behalf. IANAA, so YMMV.

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This might be true. However, getting a 409a valuation done costs only a few hundred these days. Just Google for it and you'll see a bunch of ads.

A credible 409A valuation these days (i.e., one that will withstand auditor scrutiny) will still likely cost $7K to $10K. Companies can get them more cheaply but, unless done right, these can be potential landmines waiting to go off precisely at the times when the company is most succeeding and it needs to bring in outside auditors (e.g., at the time of acquisition). Be cautious about cutting corners here.

Agreed on a better 409A post-funding. But for a pre-funding valuation number for employees 1-5, $7K is difficult, especially when the valuation of the company is likely to be south of $250K.

Agreed that an expensive 409A valuation is not needed prefunding but would add that, in most cases, companies simply skip it altogether in the prefunding stage. While 409A applies to companies at all stages, it is difficult for the IRS to second-guess prefunding valuations. More importantly, 409A applies to "deferred" compensation and, in practical terms for startups, this means options - options are not used nearly as much in the prefunding stage as is restricted stock or outright grants (neither of which vehicles are subject to the 409A requirements).

I could be wrong, but isn't this what 83b is for-- so you don't have to take the tax hit until you can actually sell your stake?

83(b) is needed when someone is granted stock that has a risk of forfeiture and so is normally used with restricted grants or with options that have an early exercise privilege (in which the stock is granted subject to repurchase of any unvested stock on termination of the service relationship) (see http://grellas.com/faq_business_startup_004.html for a full explanation).

In this case, if a restricted stock grant is made, the grant is taxed at the fair market value of the stock on date of grant - this constitutes ordinary income to the recipient. An 83(b) filing in such case would only shelter the grant from further tax hits as it may vest down the road should the fair value of the stock go up even more by the time it reaches the various vesting points.

Thus, the basic point used in the illustration above is correct. There would be as much as $50K in taxable income realized in such a case.

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