Sunday, April 20, 2014

Tax treatment of early-employee options

There is a great post from Sam Altman on Employee Equity.  I think it reflects many things that I've agreed with for quite some time.  The paragraph that I think is particularly salient is as follows:

With regard to tax treatment of options:

I think there are a lot of ways to fix this.  The easiest would be if the IRS would agree to not tax illiquid private stock until it gets sold, and then tax the gain from the basis as long-term capital gains and the original value as ordinary income.

Another might be to create a new class of employee stock.  Today, in an early-stage company, common shares are usually worth much less than preferred shares.  It might be possible to create a class of shares with less rights than common and thus worth even less.  The idea would be to convert these shares into common on an acquisition or IPO, but before that, they would be non-transferable and have no value.  If it were possible to create a class of stock that the IRS agreed had next to zero value, it might be possible to grant employees this sort of stock, have them owe a tiny bit of tax on it now, and then have normal long-term capital gains treatment years later when the startup goes public.

What about it IRS?  I think that it is high-time to fix the tax treatment for early employees of companies.  Right now, there is a huge divide between those employees wealthy enough to hang on to their options, and those that cannot.  This needs to be changed.