I've nearly gone bankrupt due to AMT on ISOs, and I've also been forced to put up considerable money to exercise Non-Quals after leaving the company. I definitely applaud Pinterest's move here. My former employer went public, the top execs are still making a ton of money, and yet Finance still hasn't implemented a similar post-termination plan. A lot of former colleagues are still at the company due to 'mildly-golden' handcuffs-- the tax liability that their options present is now large and complicated. Companies that fail to adopt changes like these disadvantage themselves in a variety of subtle but important ways.
What would be even better is if smaller companies / start-ups just did 83(b) elections up-front (say on day one or year one upon cliff). Another (for larger companies) option is to just offer RSUs.
The bottom line is that opportunities via tax law complexity are not particularly motivating to the majority of employees (i.e. ICs), and yet ICs are the most likely to suffer near-bankruptcy due to unexpected income tax. This is a nice step in the direction of transferring deserved wealth from 'the top' to ICs, but there's still plenty of progress to be had.
But for 83(b) to be feasible, the company has to be worth essentially zero.
Let's say you join a startup that the IRS can claim is worth $20M (based on e.g. money raising valuation), and get 1% in RSUs worth $200K - depending on your other income that year, the tax bill can easily be close to $100K (if you made $100K in salary and live in NYC) for doing an 83(b), and it is still likely to be worth zero being a startup.
And before you say "the fact it raised $2M on $20M makes preferred reflect that value, not common which is still worth zero" - that is a common position, and the IRS almost never challenges 83(b) election valuations - but are you willing to risk that they won't start challenging them? I gave up more than one offer because I wasn't.
The bottom line is that the US tax system's taxing of virtual, unrealized, unrealizable profit is insane - I am not aware of any other western country that does that.
Hmm, in my case the 83(b) election would have cost me about a quarter year of salary, and the AMT I ended up owing was well over a year's worth of salary. My original grant was small relative to the pool because I was a mid-stage IC with essentially no prior experience. Perhaps for very early startups, or those growing quickly through valuation raises, the situation is different. My company only took on capital when we really ended it and it was cheap, but the C-levels were pretty consistently getting offers (so the valuation grew constantly, just not on paper).
Agree that the taxes on unrealized gains are insane, but they were intended to protect the government's income source from different problems. Tech compensation and VC has evolved dramatically since AMT was introduced.
It's not that tech compensation and VCs evolved - it is that AMT was not indexed to inflation (until 2013). When it was enacted, it applied to 155 families[0]. In 2008, it applied to nearly 4 million[0 again].
And I think sanity should not be judged by intention, but rather by action - especially when we've had more than 40 years to evaluate.
Agree that more use of 83(b) would reduce the frequency of startup equity taxation horror stories.
The value of startup equity, given all the risk factors and historical outcome data, is extremely low. It's usually easy to show that an entire startup is worth less than $1K. Using 83(b) to pay tax on the equity FMV when awarded rather than when vested/exercised/etc can make a big, big difference. If you win the equity lottery, that is.
> What would be even better is if smaller companies / start-ups just did 83(b) elections up-front (say on day one or year one upon cliff). Another (for larger companies) option is to just offer RSUs.
I was giving the choice and I elected 1/2 RSUs and 1/2 stock.
Well the RSUs required one of two things: laying down a whole lot of money to purchase them up front or accepting the loan and promissory note from the company. I'm the only one that went 50/50. I had thought i was being clever and getting the options first (highest risk in first 2 years) and the RSUs second, but it turns out that even though i had a vesting schedule like that it was valid because the board would have had to vote on something like that. It's almost moot at this point though.
What would be even better is if smaller companies / start-ups just did 83(b) elections up-front (say on day one or year one upon cliff). Another (for larger companies) option is to just offer RSUs.
The bottom line is that opportunities via tax law complexity are not particularly motivating to the majority of employees (i.e. ICs), and yet ICs are the most likely to suffer near-bankruptcy due to unexpected income tax. This is a nice step in the direction of transferring deserved wealth from 'the top' to ICs, but there's still plenty of progress to be had.