anyone know anything about employee stock grants?

[SivaGanesha 2]

Hi all,

Does anyone know anything about employee stock grants?

I work for a startup which is not public and is not likely to go public any time soon. My employer wants to give me a grant of stock in the company. However, my understanding is that this is not such a good deal for me--even if the employer pays for it--because I have to pay tax up front on the fair market value of the stock. Then if the stock proves to be worthless (I hope this doesn't happen but it's a very high risk with a startup) I still end up owing tax to the IRS even though I never received anything of any real value.

Anyone have any experience? I'm not looking for accounting advice but just sharing of info from anyone who might have been an employee who had a similar plan in the past.

Thanks!!

"It's hard to have fun at 4-way unless your whole team gets down to the ground safely to do it again!"--Northern California Skydiving League re USPA Safety Day, March 8, 2014

[NewGuy2005 51]

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However, my understanding is that this is not such a good deal for me--even if the employer pays for it--because I have to pay tax up front on the fair market value of the stock.

I am not an authority on this subject.

I don't think that is the case. If the stock is not publicly traded, how would the IRS determine the market value? I don't think you pay tax until you sell it.

[SivaGanesha 2]

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I don't think that is the case. If the stock is not publicly traded, how would the IRS determine the market value? I don't think you pay tax until you sell it.

My understanding--although it is not clear if even my employer has the full story yet--is that the market value will be based on the valuation of the company that was used when we accepted our most recent investment from an angel investor.

"It's hard to have fun at 4-way unless your whole team gets down to the ground safely to do it again!"--Northern California Skydiving League re USPA Safety Day, March 8, 2014

[PhreeZone 15]

There are multiple types of employee stock options. What you need to do is determine the type and then talk to a financial advisor to determine how that will be impacting your tax status. Some options like restrictive options they pay for and give you the shares prepaid for, you have to pay the tax on accepting those options. Some options are options to purchase given shares at a set price, those you have to pay for when you actually exercise the option. The pay option usually means if they grant you say 100 options you have to either sell something like 40-50 of them to cover the purchase of the options (or front the purchase in cash) and are left with some options (which you have to pay tax on the money you made when you sold them) and then you can hold the remaining shares for a year or more to fall into the long term capital gains tax percentages instead of the short term (higher rate). In addition to these methods there are lots of other methods, you need to determine how each is going to impact you.

This is really something that you need a LOT more info on including since it is a private company what are the options exercisable by?

Yesterday is history
And tomorrow is a mystery

Parachutemanuals.com

[SivaGanesha 2]

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There are multiple types of employee stock options. What you need to do is determine the type and then talk to a financial advisor to determine how that will be impacting your tax status. Some options like restrictive options they pay for and give you the shares prepaid for, you have to pay the tax on accepting those options. Some options are options to purchase given shares at a set price, those you have to pay for when you actually exercise the option. The pay option usually means if they grant you say 100 options you have to either sell something like 40-50 of them to cover the purchase of the options (or front the purchase in cash) and are left with some options (which you have to pay tax on the money you made when you sold them) and then you can hold the remaining shares for a year or more to fall into the long term capital gains tax percentages instead of the short term (higher rate). In addition to these methods there are lots of other methods, you need to determine how each is going to impact you.

This is really something that you need a LOT more info on including since it is a private company what are the options exercisable by?

Thanks for the info--I agree I need to run this by a financial advisor--as of yet my employer has not put enough of the details on the table for me to be able to do so, though.

The short story is that I just completed 1 year of service and am supposed to get some options; however, my employer wants to change it from a grant of options to a direct grant of stock. Employer claims this is to my advantage but I'm not so sure.

And the long story unfortunately I don't have yet--as I say so far the employer is a little short on the details.

Thanks again for your reply!

"It's hard to have fun at 4-way unless your whole team gets down to the ground safely to do it again!"--Northern California Skydiving League re USPA Safety Day, March 8, 2014

[Gary73 8]

With stock grants, the value is generally determined at the time the company goes publc; the opening price on the first day of trading.

You have three basic options:

1. If the stock is going to go up, accept the entire grant, then later sell enough of the stock to pay the taxes. Then sell the rest before it goes down.

2. If the stock is going to go down, have the employer automatically sell enough of your shares to pay your withholding tax, then sell the rest as soon as you get them.

3. What? You don't know whether the stock will go up or down? In that case, choose the safe path: option two above, but only sell half the shares.

A friend of mine tried option 1, the stock went down, and he had to take out a second mortgage to pay the taxes. I basically did option three and even though the stock went up then way down, I came out well ahead. Hope this helps.

"Extraordinary claims require extraordinary evidence." - Carl Sagan

[popsjumper 2]

IMHO, you gotta have a tax lawyer to work out the mess.

My reality and yours are quite different.
I think we're all Bozos on this bus.
Falcon5232, SCS8170, SCSA353, POPS9398, DS239

[SivaGanesha 2]

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IMHO, you gotta have a tax lawyer to work out the mess.

A tax lawyer? Don't you mean a tax accountant? I thought tax lawyers deal with things like criminal tax evasion cases and fighting IRS collection actions. Tax lawyers don't crunch numbers--that is the job of tax accountants.

"It's hard to have fun at 4-way unless your whole team gets down to the ground safely to do it again!"--Northern California Skydiving League re USPA Safety Day, March 8, 2014

[SivaGanesha 2]

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2. If the stock is going to go down, have the employer automatically sell enough of your shares to pay your withholding tax, then sell the rest as soon as you get them.

Thanks for the reply. How does one sell the stock, though, if it isn't publicly traded? For example, if I wanted to sell the stock to you, there is no way I could get you enough information for you to make an informed decision about the stock without violating my NDA.

That's my concern about accepting actual stock rather than options--it seems to me I'd probably be stuck with stock that I might not want.

"It's hard to have fun at 4-way unless your whole team gets down to the ground safely to do it again!"--Northern California Skydiving League re USPA Safety Day, March 8, 2014

[ryoder 1,391]

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A tax lawyer? Don't you mean a tax accountant? I thought tax lawyers deal with things like criminal tax evasion cases and fighting IRS collection actions.

I'm sure PopsJumper was speaking from his own past experiences.

"There are only three things of value: younger women, faster airplanes, and bigger crocodiles" - Arthur Jones.

[tetra316 0]

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2. If the stock is going to go down, have the employer automatically sell enough of your shares to pay your withholding tax, then sell the rest as soon as you get them.

Thanks for the reply. How does one sell the stock, though, if it isn't publicly traded? For example, if I wanted to sell the stock to you, there is no way I could get you enough information for you to make an informed decision about the stock without violating my NDA.

That's my concern about accepting actual stock rather than options--it seems to me I'd probably be stuck with stock that I might not want.

You probably won't be able to "sell" it. Generally private companies place restrictions on their stock. Such as only the Company can purchase it back. If you leave the company there's usually a buyout in place for any stock you hold. It probably will not be something easily bought and sold.

[Andy9o8 0]

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IMHO, you gotta have a tax lawyer to work out the mess.

A tax lawyer? Don't you mean a tax accountant? I thought tax lawyers deal with things like criminal tax evasion cases and fighting IRS collection actions. Tax lawyers don't crunch numbers--that is the job of tax accountants.

Not necessarily correct. There is some overlap between what tax lawyers do and what tax accountants do. Many tax attorneys focus their practices mainly on tax planning and savings devices, complex estate planning, and elder law planning from a tax-avoidance perspective, and do little if any IRS/criminal work. Oh, and tax lawyers most definitely do crunch numbers.

[jsaxton 0]

There are two cases here:
1) Stock grant
2) Stock OPTION

I have never received a grant but I can tell you how options work in the state of California. PM me if this is what you need to know.

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I don't think that is the case. If the stock is not publicly traded, how would the IRS determine the market value? I don't think you pay tax until you sell it.

My understanding--although it is not clear if even my employer has the full story yet--is that the market value will be based on the valuation of the company that was used when we accepted our most recent investment from an angel investor.

[Gawain 0]

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2. If the stock is going to go down, have the employer automatically sell enough of your shares to pay your withholding tax, then sell the rest as soon as you get them.

Thanks for the reply. How does one sell the stock, though, if it isn't publicly traded? For example, if I wanted to sell the stock to you, there is no way I could get you enough information for you to make an informed decision about the stock without violating my NDA.

That's my concern about accepting actual stock rather than options--it seems to me I'd probably be stuck with stock that I might not want.

Basically, your company is offering you ownership through their privately held stock. Many private companies comprise themselves of say, 10,000 total shares. If they offer you stock, you are then entitled to certain benefits of owning that stock, whether it be sharing in the profits (which you will pay tax on) or having a certain amount of say in the future direction that the company takes. Of course, this is a matter of how much they are offering you too.

Now, if I were in your position, I would ask the following questions:

-- What percentage of the company does this stock represent?
-- What are my liabilities if the company loses money?
-- What benefits are there to this stock when the company makes a profit?
-- Will I be able to maintain ownership if I leave the company, or will you buy these shares back, based on what value?
-- What position will this place me if the company plans an IPO?
-- What might I be required to commit to by accepting these shares?
-- What restrictions exist with my acceptance of this stock?

These shares are not traded on the open market, their value is based solely on the value of the company, not market share, or speculation. You will likely not be allowed to sell these shares to anyone other than the company, and even then, you may not be able to do so unless they are willing to buy it back.

Many start-ups do this as an intangible benefit in lieu of increasing salaries, or other benefits which might draw cash away from other critical investment initiatives. This is a good thing that the company is doing for you, it gives you skin in the game and if the company plays its cards right, and does an IPO, you should be well positioned with common stock.

My sister was the 22nd employee hired at Priceline.com, when it was an obscure little brain-child of Walker Digital. Before she left the company, her low salary, few initial benefits, allowed the company to offer her stock, which translated to several thousand shares of PCLN on the IPO. On paper, after the IPO, everyone was a millionaire. Years later, Priceline is one of the few dot.coms worth anything (still trading well over $100/sh).

A friend of mine is a small business owner in Northern California. His business is comprised of 10,000 "shares", of which he owns them all. He gave a former employee five shares once. When this employee left the company, he thought he signed on for 5% of the company, not 5 shares. This company makes tens-of-millions a year. The difference, had it not been on paper, constituted hundreds of thousands of dollars.

So, ask questions, and get excited. If this company has the goods, it could bode very well for your financial future, and will hopefully solidify your commitment to the company (which is what they are hoping to get by promising you real equity in the company).

So I try and I scream and I beg and I sigh
Just to prove I'm alive, and it's alright
'Cause tonight there's a way I'll make light of my treacherous life
Make light!

[SivaGanesha 2]

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-- What percentage of the company does this stock represent?
-- What are my liabilities if the company loses money?
-- What benefits are there to this stock when the company makes a profit?
-- Will I be able to maintain ownership if I leave the company, or will you buy these shares back, based on what value?
-- What position will this place me if the company plans an IPO?
-- What might I be required to commit to by accepting these shares?
-- What restrictions exist with my acceptance of this stock?

Thanks for the reply.

Right now the most pressing concern for me is that, at least as I understand it so far, I'd immediately have to pay the IRS the withholding on this stock grant--unless they are willing to buy back enough of the stock to cover the withholding. And I don't have the cash to pay the IRS right now.

The reason why I don't have the cash to pay the IRS right now is that when I came on board with these guys, I agreed to accept a reduced base salary for awhile in exchange for a significant options position. Right now I need my entire base salary to live on and make a few jumps. If the company were sticking to what was originally agreed in writing, I wouldn't be facing this cash flow problem. I could accept options without an immediate outlay of cash to either the IRS or the company--usually one has a period of time to exercise the options and no taxable event or cash changes hands until one does so.

As far as increasing my commitment to the company goes, I agree that is what they are trying to do. I'm not sure whether I want to increase my commitment to them or not. The fact that they are trying to change an agreement that was made in writing itself causes me to question how much faith I should have in them. There are some things I like about this company (otherwise I wouldn't be there) but there are some things that have happened that concern me. I'd prefer to wait and see for a while longer before deepening my commitment to them. Options--the agreement that I have in writing with them--would allow me to do that. A stock grant feels to me--apart from the cash flow problem--like I'm being rushed into a decision I didn't sign on for.

"It's hard to have fun at 4-way unless your whole team gets down to the ground safely to do it again!"--Northern California Skydiving League re USPA Safety Day, March 8, 2014