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.
"Tax treatment of early-employee options"
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