[RhysU]

But why not give everyone cash consistently and then allow them to buy equity as they desire, when they desire, by reinvesting in the business at the current prevailing rate?

As even Homer Simpson figured out "Money can be exchanged for goods and services."

[lacker]

There typically is no "prevailing rate" for a startup. So just figuring out the tax implications is too much work to do it like this. Also, usually you're giving people options rather than equity; you can afford to give people larger option grants because of vesting than you could afford to sell them equity.

[nbclark]

Interesting thought. We're a private company, so the stock is still illiquid. That wouldn't prevent purchasing stock, but the question is where it would come from. Option pools are used for new employee grants so that could work, but when that runs out you need to typically create additional shares and dilute the other holders. Will put a little more thought into this.

[lostinquebec]

Isn't there a tax implication? Tax is one reason part why people choose non-monetary remuneration. I'm not American, but my guess is in all jurisdictions that tax would vary based on the type of non-monetary remuneration.

[lotsofpulp]

I'm not aware of any tax advantages of equity compensation in the US versus cash compensation. If anything, it could be a liability in the case that it's not actively traded, or if you trigger AMT and aren't able to sell the stock to pay the taxes.

The type of compensation that comes with tax benefits is things such as subsidized health insurance, 401k retirement savings, commuter benefits, dependent care expenses, tuition, etc. That type of stuff is basically non taxed income.

[sokoloff]

ISOs with an 83(b) election (and then “hit”) are much more valuable than W-2 income from a tax perspective. (Whether that W-2 income is cash salary or RSUs.)

[shuckles]

In the current tax code. Wouldn’t some of the proposals to consider more capital gains as income change that?

[lotsofpulp]

But that comes with the risk of over paying taxes, so not exactly comparable to cash compensation.

[closeparen]

If you get lucky and your options both appreciate and become liquid, this windfall is taxed at long term capital gains rates.

[sokoloff]

That depends on the facts and circumstances. If they become liquid and valuable before you exercise them, you’re taxed as wages or short-term capital gains rates on those gains.

[erik_seaberg]

I’m no expert but I thought the worst case was AMT, which taxes the bargain element when you exercise an option (rather than when you sell the received shares and recognize the gain). Are you talking about a tax on granted options, or when options are in the money but you haven’t exercised yet?

[sokoloff]

There is no tax due on unexercised options (which is not what I meant to imply above, but I left it ambiguous).

If you have non-qualified stock options (NQSOs), on the day you exercise, the difference between the strike price and the fair market price is taxed as ordinary income. That's what I was talking about.

If you have Incentive Stock Options (ISOs), the tax treatment can be more favorable if you follow certain rules, primarily that you have to sell the shares no earlier than two years after the option grant AND one year after you exercise them. The AMT calculation comes into play between the exercise and sale.

Basically, figure out exactly what you have, as the type of instrument you have changes the taxation, and read the tax laws on that. This is not tax advice.

[nbclark]

I guess it would depend how you structure the purchases. If you allow for the purchasing of a common share at the 409 valuation, you wouldn't have a tax hit until you sell it. You would be taxed on the salary used to purchase the share, however.

[cperciva]

One issue here is insider trading. Not necessarily in a breaking-the-law sense, but people who work at a startup may have a better and more up to date sense of how things are going than whoever performed the last valuation.