What's realized about these gains if the company is blocking the sale of the stock on the secondary market? This is toilet paper these people were duped into thinking was worth something. Sounds more like a lawsuit.

Yes for sure it's a raw deal for the employees, but I think Stripe is planning to enable a secondary market? In any case, we are all adults, they accepted stock options as part of your renumeration. If they don't know the risks then don't work at a private company that offers stock options.

EDIT: That being said, I think it would be reasonable to contemplate regulations that prevent private companies from blocking secondary market sales if they offer stock options/RSUs to employees.

> That being said, I think it would be reasonable to contemplate regulations that prevent private companies from blocking secondary market sales if they offer stock options/RSUs to employees.

Either that, or IRS not consider the exercise as taxable until those conditions imposed by the company preventing secondary sale are lifted.

To be fair, a venture-backed company remaining private for 10 years wasn't terribly common and probably wouldn't factor highly in anyone's risk assessment. If someone asked "what happens to these options in 10 years if you don't go public or get acquired?" they'd likely be ridiculed for being difficult. And I don't think start-ups want that to become the new mentality or they'll get more push-back on comp structure.

> If someone asked "what happens to these options in 10 years if you don't go public or get acquired?" they'd likely be ridiculed for being difficult.

Let's hit the presses: tech startups hate engineers that think of edge cases

No, this is completely incorrect. The issue in question is about stock options, not stocks themselves. If you hold actual stocks, there is no tax bill until you sell these to realize the gains, and you can hold these forever. Instead, the issue at hand is about stock options. For those, the tax bill is due on exercise. For as long as you can hold the options without exercising, you don’t owe any tax, but the problem here is that you cannot have options that do not expire or have expiration date longer than 10 years. As this deadline is getting closer, option holders need to choose between exercising (and owing taxes on resulting difference between strike price and FMV), and forfeiting the options.

If they are ISOs, tax won't be due _upon_ exercise but will show up on that years tax return. Usually the AMT will hit you (if the exercise was worth it), and you'll owe the following year.

This is a slightly longer way of saying I'm not totally sure how what you're saying invalidates what valzam said: as far as the IRS is concerned, you did realize gains (you got something of value), just not on anything "liquid," hence AMT. Perhaps they (IRS) use different terms, but that's basically what's happening.

when the gain shows up is irrelevant - IRS requires taxes to be paid on income in the quarter it is realized. Everyone needs to pay the estimated tax and then file the return for the final adjustment.

I'm not super familiar with this aspect, so this could be totally off-base: because this is sort of "out-of-band" income, it might factor into what you should be paying, but you won't be penalized for it; you didn't know exactly what the estimated income was (i don't believe you have to get a 3921 immediately upon exercise) so you can't necessarily estimate the taxes owed. This could be totally wrong? Also, I think there's a lookback period of a year that you can base your estimated taxes on.

All of this to say, I think what you're saying is a much more precise way of saying what I was trying to get at. :)

If the stock is given to you as income, you owe tax on the $$ value as though it was income. Ask anyone who works at Google or any of the big corps who give RSUs. The number of them that hit your account is always about 2/3 of the number which actually vested. The rest are withheld as taxes.

Again, you are talking about stocks. Options work completely differently. Unlike with RSUs, you don’t owe any tax on options when they vest, only when you actually exercise. I know how RSUs works, I have actually worked at Google for a number of years. Instead, you should ask someone who works at an earlier stage company how options work.

Yes, I am talking about stock, in response to:

>> If you hold actual stocks, there is no tax bill until you sell these to realize the gains

There are taxes to be paid as soon as you get the stock. If you are at google - have you noticed the number of RSUs which hit your schwab account are less than those which vested according to that chart in your schedule? That's taxes being withheld. The stock vesting is considered income at that moment and taxed as such.

I may be woefully misunderstanding here but say you exercise your options, sell them then get real cash for the sale all in the same day. Can you use that cash to pay your taxes when tax season comes around?

Yes. The problem is there are various reasons why you can’t just sell stock or an early stage company the same day.

You can use whatever cash you have to pay your taxes.

Note that the 3.5bn (withholding) tax under discussion is not about options. It's about RSUs.

(There is also a less important amount of tax due - by more ancient employees - which is about options.)

It's about double-trigger RSUs with a 7 year limit. Stripe is now in year six. If they wait any longer, the RSUs become worthless (and the employees riot).

How are they, if you're literally prevented from exchanging them to legal tender?

It's like taxing lottery tickets on potential win prize.

Actually that's not a bad analogy but against your point: options are winning lottery tickets. As long as you don't exchange them for the prize (the actual stock) you are not taxed. When you do, you have to pay tax on the difference between how much the options cost and the value you get back.

>Actually that's not a bad analogy but against your point: options are winning lottery tickets.

They are not unless you exchange them for legal _money_. Not stock.

>As long as you don't exchange them for the prize (the actual stock) you are not taxed.

Stock is not the prize - it's worth nothing alone, especially if you can't exchange it for mone. For some reason you don't tax unrealized gains on a stock you already owned, yet do the same for illiquid ones.

>When you do, you have to pay tax on the difference between how much the options cost and the value you get back.

And if you just taxed "at the end" when someone sells the stocks, you'd gain the same amount of money - difference between stock value and 0 - just in a different moment of time.

What I propose is logical and it's how it works in Poland.

What does the IRS use as market value?