8 ms·

How is this a loss? They paid taxes on gains? Not sure what the badness is here. They cashed out and paid taxes.

seattle_spring 9y ago
> How is this a loss? They paid taxes on gains? Not sure what the badness is here. They cashed out and paid taxes. They didn't take real gains, they took illiquid paper gains and paid AMT (Alternative Minimum Tax). Example: Strike price was $1 / share, "on-paper" price was $20 / share. Employee had 20,000 shares, with a "paper" gain of $380,000. They had to pay the taxes on those gains even though the stocks were not publicly traded and therefore illiquid.
- lmm 9y ago
  So they were taxed on a best-effort valuation of the thing they received from their employer? That seems like how tax is supposed to work. (How else would you do it - in-kind taxes?) Illiquid investments are a risk, if you lose money on them then you lose money on them, and you don't get back the taxes you paid, just as you don't get back the taxes on income you lost at the card tables.
  - seattle_spring 9y ago
    Then you must support paying unrealized gains on your home and stocks each year, even if you don't sell them? Because it's literally the same thing. > How else would you do it The same way every other investment works: Tax the gains when the asset is sold.
    - lmm 9y ago
      > Then you must support paying unrealized gains on your home and stocks each year, even if you don't sell them? Yes, I do. I think the whole notion that you pick and choose when to realise gains invites abuse.
      - seattle_spring 9y ago
        This would bankrupt so many homeowners.
        lmm 9y ago
        Then prices would fall to the point where people could afford their homes, or governments would run massive surpluses and could lower their tax rates to remove the burden, or some combination of the two effects. It would remove the disincentive to trade homes which is bad for everyone: if I live next to your job and you live next to my job we'd both be better off if we bought and sold each other's houses, but at the moment we're discouraged from doing that because our tax bills would come due.
btown 9y ago
If this is an honest question... an employee who left the firm after 2013 and wanted to exercise their stock options needed to pay taxes up front on shares they received, based on the company's then $700mm+ valuation. But now the price of those shares is significantly less, based on the $100mm sale price. So they ended up paying more in taxes on their stock than they can receive now from the sale of their stock. This article explains the dynamics well: https://www.recode.net/2016/1/19/11588918/gilt-groupe-is-a-cautionary-tale-for-startup-employees-banking-on https://www.recode.net/2016/1/19/11588918/gilt-groupe-is-a-c... In this case, one of the controversies is that company leadership may not have taken such a low sale price (given that they initially had offers of more than twice that) had they not been compensated with personal payoffs outside of the equity structure.
- nshelly 9y ago
  Right, but the $700m valuation was preferred, and the employees likely paid AMT tax on the FMV (about 10-30% of that value). It's certainly sad but at least they can write off the AMT loss against capital gains if they have any and wish to, or take the $3,000 credit every year.
  - caseysoftware 9y ago
    But that is the nasty part. The taxes were paid up front while the credit will be applied over years. Odds are they had to liquidate something else, borrow money, etc so it's not just the lost equity but the opportunity cost. There's always the "they knew they could lose it!" line but if the leadership was lying internally and externally, I hope they get sued into oblivion.
  - bfritton 9y ago
    The article was stating that the employees who exercised their options didn't actually gain any cash. They paid taxes on the "value" of the shares they received (converting from options to actual stock), and not on any real sweet cash money. I think the point is that for most of these people, even if parts of that loss may be recoverable later on (not sure about that), being out $40k - $100k+ on what was a badly misrepresented liklihood stings against execs getting their preference and bonus pool shares. The incentives did not line up, like their press release conflated.
maxerickson 9y ago
Exercising an option isn't the same thing as cashing out. I mean, it generally should be (in the sense that you exercise to sell) but some people don't realize that.
- pbreit 9y ago
  What do you mean? If you leave a company you are generally forced to decide to exercise or not within 90 days even though you might not actually "cash out" for years, if ever.
  - maxerickson 9y ago
    I'm implying that exercising illiquid options is frequently a bad idea. Exactly because of the tax consequences and risk.
fossuser 9y ago
You can't always sell the share after exercise. You're taxed on the spread between strike price and fair market valuation as income on exercise, not on sale. There is an exception around taxes for ISOs that recently became useful with the AMT change in the new tax law, but even in that case you often can't sell the share after you've exercised it without permission from your private company (which you are very unlikely to get).

> How is this a loss? They paid taxes on gains? Not sure what the badness is here. They cashed out and paid taxes. They didn't take real gains, they took illiquid paper gains and paid AMT (Alternative Minimum Tax). Example: Strike price was $1 / share, "on-paper" price was $20 / share. Employee had 20,000 shares, with a "paper" gain of $380,000. They had to pay the taxes on those gains even though the stocks were not publicly traded and therefore illiquid.

lmm 9y ago
So they were taxed on a best-effort valuation of the thing they received from their employer? That seems like how tax is supposed to work. (How else would you do it - in-kind taxes?) Illiquid investments are a risk, if you lose money on them then you lose money on them, and you don't get back the taxes you paid, just as you don't get back the taxes on income you lost at the card tables.
- seattle_spring 9y ago
  Then you must support paying unrealized gains on your home and stocks each year, even if you don't sell them? Because it's literally the same thing. > How else would you do it The same way every other investment works: Tax the gains when the asset is sold.
  - lmm 9y ago
    > Then you must support paying unrealized gains on your home and stocks each year, even if you don't sell them? Yes, I do. I think the whole notion that you pick and choose when to realise gains invites abuse.
    - seattle_spring 9y ago
      This would bankrupt so many homeowners.
      - lmm 9y ago
        Then prices would fall to the point where people could afford their homes, or governments would run massive surpluses and could lower their tax rates to remove the burden, or some combination of the two effects. It would remove the disincentive to trade homes which is bad for everyone: if I live next to your job and you live next to my job we'd both be better off if we bought and sold each other's houses, but at the moment we're discouraged from doing that because our tax bills would come due.

btown 9y ago

If this is an honest question... an employee who left the firm after 2013 and wanted to exercise their stock options needed to pay taxes up front on shares they received, based on the company's then $700mm+ valuation. But now the price of those shares is significantly less, based on the $100mm sale price. So they ended up paying more in taxes on their stock than they can receive now from the sale of their stock. This article explains the dynamics well: https://www.recode.net/2016/1/19/11588918/gilt-groupe-is-a-cautionary-tale-for-startup-employees-banking-on https://www.recode.net/2016/1/19/11588918/gilt-groupe-is-a-c... In this case, one of the controversies is that company leadership may not have taken such a low sale price (given that they initially had offers of more than twice that) had they not been compensated with personal payoffs outside of the equity structure.

nshelly 9y ago
Right, but the $700m valuation was preferred, and the employees likely paid AMT tax on the FMV (about 10-30% of that value). It's certainly sad but at least they can write off the AMT loss against capital gains if they have any and wish to, or take the $3,000 credit every year.
- caseysoftware 9y ago
  But that is the nasty part. The taxes were paid up front while the credit will be applied over years. Odds are they had to liquidate something else, borrow money, etc so it's not just the lost equity but the opportunity cost. There's always the "they knew they could lose it!" line but if the leadership was lying internally and externally, I hope they get sued into oblivion.
- bfritton 9y ago
  The article was stating that the employees who exercised their options didn't actually gain any cash. They paid taxes on the "value" of the shares they received (converting from options to actual stock), and not on any real sweet cash money. I think the point is that for most of these people, even if parts of that loss may be recoverable later on (not sure about that), being out $40k - $100k+ on what was a badly misrepresented liklihood stings against execs getting their preference and bonus pool shares. The incentives did not line up, like their press release conflated.

maxerickson 9y ago

Exercising an option isn't the same thing as cashing out. I mean, it generally should be (in the sense that you exercise to sell) but some people don't realize that.

pbreit 9y ago
What do you mean? If you leave a company you are generally forced to decide to exercise or not within 90 days even though you might not actually "cash out" for years, if ever.
- maxerickson 9y ago
  I'm implying that exercising illiquid options is frequently a bad idea. Exactly because of the tax consequences and risk.

fossuser 9y ago

You can't always sell the share after exercise. You're taxed on the spread between strike price and fair market valuation as income on exercise, not on sale. There is an exception around taxes for ISOs that recently became useful with the AMT change in the new tax law, but even in that case you often can't sell the share after you've exercised it without permission from your private company (which you are very unlikely to get).