> Sources familiar with the legislation tell me that there could still be tweaks to the language, so don't be surprised if all of this gets addressed. Particularly given that a top Sanders campaign advisor is Rep. Ro Khanna (D-CA), whose district includes such Silicon Valley burgs as Cupertino and Sunnyvale.
> The bottom line: This isn't about how much people pay in taxes. It's about when they pay it. It would make more sense for the timing to match the receipt.
You've badly misunderstood the article. (Maybe the article is wrong tho, and it's you that got it right. I didn't read the bill.)
This bill changes when taxes are due for non-quals.
You already pay taxes upon exercise of non-quals. So the ability to pay at exercise does almost nothing to further inequality. In fact it's hugely risky and in almost all cases, a bad idea that leads to lots of money lost. In that sense, having the money to pay the taxes (anyway) improves inequality to the degree that it saps the assets of those with family funds and distributes it (via programs paid for via taxes) to the less fortunate. The opposite of what you're claiming, and what is the case today.
This bill changes the tax to become due at vesting. It will either not pass, or will become immediately ineffective as vesting schedules change to a 10 year cliff, with a single [4-year] pro-rata vest upon termination. IOW, for tax purposes you won't vest-as-you-go anymore. You'll vest all at once upon termination. If you choose to not buy your options the company will cancel the option agreement. If you do choose to buy them, the tax consequences are identical as today. Such a thing would be awful for ISOs but for non-quals it doesn't matter. For ISOs you want to buy them early as you can. For non-quals you pay tax upon exercise, so you don't want to buy them as-you-vest anyway.
It's also hilarious when you think about it. For almost all startup employees, a long enough time scale reveals that the real value of those stock options is exactly zero dollars.
This would have people paying taxes on fictional or purported wealth. As dumb as the tax code is, this isn't even reform.
My understanding of the bill is that the tax would apply to the strike price value. $100,000 in strike price is quite a lot more than what your typical startup employee has, and that first $100,000 per year isn't even taxed. For this to apply to you, you'd have to be receiving a ton of options.
“The bottom line: This isn't about how much people pay in taxes. It's about when they pay it. It would make more sense for the timing to match the receipt.”
It may be worse than that, and it may be about how much people pay in taxes. It’s the same logic as tax deferred retirement accounts. The federal government is either going to spend capital immediately (no gains) or they’re going to make very constrained gains. Which makes a ton of sense, for a government. But if you let wealth sit in the private sector for a period of time, you can let it grow at rates that vastly exceed, compounded especially, what the government can pull. The taxpayer will pay more taxes in raw dollars, but they’re going to end up with more money, both sides are winning.
> That means it would be most likely affect employees at later-stage startups, where the strike prices are higher.
Putting aside whether or not this is a good idea (I'm sure most of us think it is not), it surely ought to be measured on fair value MINUS strike price?
The fair value of options is heavily dependent on the strike price to begin with (see [0]). The wording you quoted from TFA is strange at best, and it's inaccurate if interpreted literally - an option with a higher strike price is less valuable than an otherwise equivalent option with a lower strike price. If anything, I'd expect later-stage startups to issue options with lower strike prices relative to their current valuation (since they have less remaining growth potential than early-stage startups), which does mean employees at later-stage startups would be more likely to be impacted.
For what it's worth, you can get far more upside exposure from $100k worth of options (the maximum tax-free amount per year under this plan) than you'd get from $100k worth of equity if the options are far out of the money. I'm not familiar with the specifics of how option values are calculated for early-stage startups, but I'd expect that a startup worth $20M can issue options with a strike of $100M and report those options at a fair value very close to $0.
These federal policies that don’t account for regional differences in income are a problem. The salary level where this kicks in is $130k. On the peninsula in the Bay Area where many people will be effected, the average price of a home is about 7X the national average. $130k might be a lot where home prices are $300k, but around here it’s barely a living wage. If your taxed an additional 40% on a possible $100k that you may never see, then it becomes poverty level in this area.
$100k in stock at vest time valuation is an huge amount.
If your are an employee with a quite large 0.05% equity grant per year, that's a $2Billion unicorn already that is ready to IPO or buy back shares from employees.
> around here it’s barely a living wage
I dare you to say that to your janitor or receptionist.
Working in a startup that turns into a pre-ipo $2bn unicorn is like winning the startup lottery. The majority of years spent in early stage startups is spent accumulating worthless stock, where paper valuations will never materialize outside a funding negotiation room.
> I dare you to say that to your janitor or receptionist.
Yes I understand unskilled workers are worse off, but I’m not sure what your argument is there.
That guy has some level of seniority so he can work an average of 11 hours a day, 365 days a year. If you lower that to averaging not working 5 days every 2 months (so still working 56 of 61 days every 2 months), he’d be averaging 12 hours a day.
This possibly makes the case even worse for janitors than help showing how they fare.
Roughly estimating. If a person has 2 days off per week (weekends) and either 12 or 24 total days off a year from federal holidays, sick days, vacation days, that is an average of 20 or 21 working days a month.
The chance of getting in early enough to a $2B company that exits comfortably has to be under 1%. Maybe under 0.5%. CB Insights has an article from a few years ago saying 1.28%.
Taking out companies below $2B, companies that didnt pan out so well (Magic Leap, Zenefits, WeWork), and you doing the right things to take advantage of your equity, I’m guessing that number drops to 0.35% or 0.25% or 1 in 300-400 startups.
Might as well not consider such an unlikely scenario. Plus if things don’t pan out at a startup and you’re just looking for money. You quite possibly made less during those years.
If, on the other hand, you got a tax break for living in the high-cost Bay Area, then you could buy a house to build a lot of wealth and sell it later to retire someplace cheaper. Not exactly fair to people who live where salaries are lower.
The proper way to make things fair is to tax landlords on the land value [1] of their properties. They are the ones pulling in all the unearned income in high cost areas.
> The proper way to make things fair is to tax landlords on the land value of their properties. They are the ones pulling in all the unearned income in high cost areas.
Bernie owns 3 houses, he will never support land value tax. Almost all progressive Berniecrats in Bay Area are NIMBYs [1].
Bernie is right about healthcare, but he is wrong about virtually everything else, in my opinion.
It's already horseshit that the income is taxed on exercise. Just treat capital gains as normal income and tax it when the gains are realized as cash.
I hope this doesn't apply to options without liquidity. Otherwise we should just go ahead and tax scratchers on their potential prize value at purchase.
If this goes through I guess I can't work for a startup anymore. I'm already paying too much in taxes and rent to build wealth, might as well give up on innovating for a small company and work someplace that can pay me and give me options on stocks that I can sell. What a dumb idea Bernie, and I want to vote for you.
If it goes through, startups will need to change their employee incentives to compensate, and companies who don't will find that they're now way below market rate.
Startups are already way below market rate if the market includes public companies, and you only count liquid stock compensation. The only startups that even come close are ones that are about to IPO.
Yes. So is that really the point here, to make it increasingly harder for people to not work in large companies? Perhaps this is another example of progressive legislation that gets hijacked by incumbent big business by some clause agreed to during negotiation where people don’t know what they are agreeing to. I imagine this draft law was negotiated between concerned parties.
I read a fascinating book called The Power Broker by Robert Caro, that showed how lawyers conduct a type of ambush warfare with new laws. What they are really gunning for is not apparent until the law goes into effect, it’s too subtle for people to see from the text.
I'm on board with your first suggestion - it all gets a lot simpler (and fairer) if you just tax the realized gains.
For the rest though, it may be worth pointing out that the first $100,000 in qualified stock options _per year_ are not taxed. If you're in a situation where the taxes on $(your annual options) - $100,000 are significant in comparison to your rent, I'd wager you're doing pretty well.
> Sources familiar with the legislation tell me that there
> could still be tweaks to the language, so don't be
> surprised if all of this gets addressed. *Particularly
> given that a top Sanders campaign advisor is Rep. Ro
> Khanna (D-CA), whose district includes such Silicon
> Valley burgs as Cupertino and Sunnyvale.*
Roth funds are the opposite of progressive. It’s possible to accumulate millions in roth funds where the eventual net effective tax rate is close to 0%. We already put income caps on roth funds for this reason but it’s just too easy to game.
More important than that is just normalizing taxes to something people pay when they realize income instead of this convoluted system we have now.
If I was founding a new country today, I'd put in the constitution that governments shall not impose tax more than 33% aggregated in all forms on any person. Between federal tax, sales tax, social security, tolls, sales tax, property tax, registration fees, identity fees, license fees etc etc, governments all over the world have become one money-hungry institution that have failed to provide proportionally economically efficient services.
> have failed to provide proportionally economically efficient services
This myth appealing to some automagical optimality of "free markets" has been disproved in real conditions time and time again in domains like healthcare, transports, telecoms or urban planning. Please don't pull that science string when discussing societal choices, especially out here where there will be people contradicting you that probably share your technical knowledge.
Even in the developed world, governments have an enormous amount of process overheads and forgo optimizations that are otherwise obvious in places like a startup. This is for a reason aka very high functional guarantees which require extensive peer-reviews and associated approvals by a long hierarchy of authority in order to avoid corruption and abuse of its monopoly. This is the stuff free markets don't have to worry about. This is not a myth and no need to pull any strings. Anyone trying to prove that governments are economically efficient agency has a far harder task in theory and practice. This is why countries that limit government functions to things like defense and infrastructure often achieve faster and better economic efficiency. The countries which have expected the government to function like business to provide any and all services in return of payment called taxes have performed much worse.
I think it's pretty obvious that we have deeply differing opinions about social organizations, as such we both have to take care not to resort to axioms of our respective ideology if we want to talk to each other. In particular, i repeat my previous point: i do not accept your use of "economic efficiency" (for me the material well-being is only a part of the goal). Again, "monopoly [..] the stuff free markets don't have to worry about": no, free markets tend to monopolies in real-life scenarios. Indeed since wealth and power distribution is already highly unequal, any kind of structure will be abusive, with incentives to use its leverage to grow an even bigger share.
> The countries which have expected the government to function like business to provide any and all services in return of payment called taxes have performed much worse.
Again this i do not accept. For one such a government (which is usually called socialist) is very far from a business since it is strongly limited in scope (shouldn't particularly seek expansion) and doesn't seek to extract marginal profit. Two characteristics which are in contradiction with a consensual definition of "business". It would be more accurate to describe it as a cooperative which is very much anti-capitalistic in nature (i assume you agree that "business" is a capitalistic concept).
You are conflating different issues here. Income equality is not actually due to free markets. Monopolies in free markets do emerge but in the socialist system (defined as government providing services in return of taxes other than infrastructure, defense and health+education safety nets) the government is defacto army-enforced monopoly. And yes, no system is perfect.
You have perhaps not heard about how governments all over the world have enriched themselves by monopolizing everything from entire industries, natural resources to sports teams while promising better services to the public (spoiler: didn't work out for vast majority except for Norway). You have perhaps also never been involved in government grants and contracts to see first hand how extraordinarily inefficient, bureaucratic, slow, irresponsive, unmaliable, frustrating, insensitive and far behind the time these entities are top to the bottom.
To anyone dreaming of a socialist system as salvation, I would highly recommend taking up a year or two of a government job to see how it actually functions and what are your chances to improve it even a tiny little bit.
43 comments
[ 2.6 ms ] story [ 95.3 ms ] thread> Sources familiar with the legislation tell me that there could still be tweaks to the language, so don't be surprised if all of this gets addressed. Particularly given that a top Sanders campaign advisor is Rep. Ro Khanna (D-CA), whose district includes such Silicon Valley burgs as Cupertino and Sunnyvale.
> The bottom line: This isn't about how much people pay in taxes. It's about when they pay it. It would make more sense for the timing to match the receipt.
This bill changes when taxes are due for non-quals.
You already pay taxes upon exercise of non-quals. So the ability to pay at exercise does almost nothing to further inequality. In fact it's hugely risky and in almost all cases, a bad idea that leads to lots of money lost. In that sense, having the money to pay the taxes (anyway) improves inequality to the degree that it saps the assets of those with family funds and distributes it (via programs paid for via taxes) to the less fortunate. The opposite of what you're claiming, and what is the case today.
This bill changes the tax to become due at vesting. It will either not pass, or will become immediately ineffective as vesting schedules change to a 10 year cliff, with a single [4-year] pro-rata vest upon termination. IOW, for tax purposes you won't vest-as-you-go anymore. You'll vest all at once upon termination. If you choose to not buy your options the company will cancel the option agreement. If you do choose to buy them, the tax consequences are identical as today. Such a thing would be awful for ISOs but for non-quals it doesn't matter. For ISOs you want to buy them early as you can. For non-quals you pay tax upon exercise, so you don't want to buy them as-you-vest anyway.
It's very poorly thought out.
This would have people paying taxes on fictional or purported wealth. As dumb as the tax code is, this isn't even reform.
It may be worse than that, and it may be about how much people pay in taxes. It’s the same logic as tax deferred retirement accounts. The federal government is either going to spend capital immediately (no gains) or they’re going to make very constrained gains. Which makes a ton of sense, for a government. But if you let wealth sit in the private sector for a period of time, you can let it grow at rates that vastly exceed, compounded especially, what the government can pull. The taxpayer will pay more taxes in raw dollars, but they’re going to end up with more money, both sides are winning.
Putting aside whether or not this is a good idea (I'm sure most of us think it is not), it surely ought to be measured on fair value MINUS strike price?
For what it's worth, you can get far more upside exposure from $100k worth of options (the maximum tax-free amount per year under this plan) than you'd get from $100k worth of equity if the options are far out of the money. I'm not familiar with the specifics of how option values are calculated for early-stage startups, but I'd expect that a startup worth $20M can issue options with a strike of $100M and report those options at a fair value very close to $0.
[0] https://en.wikipedia.org/wiki/Black–Scholes_model#Black–Scho...
Maybe this guy does not know what he is doing?
If your are an employee with a quite large 0.05% equity grant per year, that's a $2Billion unicorn already that is ready to IPO or buy back shares from employees.
> around here it’s barely a living wage
I dare you to say that to your janitor or receptionist.
> I dare you to say that to your janitor or receptionist.
Yes I understand unskilled workers are worse off, but I’m not sure what your argument is there.
Whataboutism. Just because other problems exist does not make this problem not exist.
This possibly makes the case even worse for janitors than help showing how they fare.
Roughly estimating. If a person has 2 days off per week (weekends) and either 12 or 24 total days off a year from federal holidays, sick days, vacation days, that is an average of 20 or 21 working days a month.
Taking out companies below $2B, companies that didnt pan out so well (Magic Leap, Zenefits, WeWork), and you doing the right things to take advantage of your equity, I’m guessing that number drops to 0.35% or 0.25% or 1 in 300-400 startups.
Might as well not consider such an unlikely scenario. Plus if things don’t pan out at a startup and you’re just looking for money. You quite possibly made less during those years.
The proper way to make things fair is to tax landlords on the land value [1] of their properties. They are the ones pulling in all the unearned income in high cost areas.
[1] https://en.wikipedia.org/wiki/Land_value_tax
Bernie owns 3 houses, he will never support land value tax. Almost all progressive Berniecrats in Bay Area are NIMBYs [1].
Bernie is right about healthcare, but he is wrong about virtually everything else, in my opinion.
[1] https://sf.curbed.com/2020/2/20/21122662/san-francisco-bay-a...
I hope this doesn't apply to options without liquidity. Otherwise we should just go ahead and tax scratchers on their potential prize value at purchase.
If this goes through I guess I can't work for a startup anymore. I'm already paying too much in taxes and rent to build wealth, might as well give up on innovating for a small company and work someplace that can pay me and give me options on stocks that I can sell. What a dumb idea Bernie, and I want to vote for you.
For example: https://danluu.com/startup-options/
I read a fascinating book called The Power Broker by Robert Caro, that showed how lawyers conduct a type of ambush warfare with new laws. What they are really gunning for is not apparent until the law goes into effect, it’s too subtle for people to see from the text.
For the rest though, it may be worth pointing out that the first $100,000 in qualified stock options _per year_ are not taxed. If you're in a situation where the taxes on $(your annual options) - $100,000 are significant in comparison to your rent, I'd wager you're doing pretty well.
Problem solved.
More important than that is just normalizing taxes to something people pay when they realize income instead of this convoluted system we have now.
This myth appealing to some automagical optimality of "free markets" has been disproved in real conditions time and time again in domains like healthcare, transports, telecoms or urban planning. Please don't pull that science string when discussing societal choices, especially out here where there will be people contradicting you that probably share your technical knowledge.
> The countries which have expected the government to function like business to provide any and all services in return of payment called taxes have performed much worse.
Again this i do not accept. For one such a government (which is usually called socialist) is very far from a business since it is strongly limited in scope (shouldn't particularly seek expansion) and doesn't seek to extract marginal profit. Two characteristics which are in contradiction with a consensual definition of "business". It would be more accurate to describe it as a cooperative which is very much anti-capitalistic in nature (i assume you agree that "business" is a capitalistic concept).
You have perhaps not heard about how governments all over the world have enriched themselves by monopolizing everything from entire industries, natural resources to sports teams while promising better services to the public (spoiler: didn't work out for vast majority except for Norway). You have perhaps also never been involved in government grants and contracts to see first hand how extraordinarily inefficient, bureaucratic, slow, irresponsive, unmaliable, frustrating, insensitive and far behind the time these entities are top to the bottom.
To anyone dreaming of a socialist system as salvation, I would highly recommend taking up a year or two of a government job to see how it actually functions and what are your chances to improve it even a tiny little bit.