> CNBC talked to three former employees who lost between $40,000 and over $100,000 each because they exercised their options in previous years and had to pay tax based on their heightened value at the time.
Interestingly, the recently passed tax reform bill seems to make this type of loss less likely - though it would seem to be too late for these employees.
This is the thing that totally baffles me. If you own shares of the company and they are worth reasonable ( say 40-100k ) amount and you are not someone who has no money in a bank (which is the only time when you should be banking on those 40-100k extra compensation) , and you are being screwed in a buyout you have all the leverage your need: it is spelled lawsuit. Lawsuits throw a monkey wrench into liabilities section so the company has all kinds of intensives to make them go away.
If this is an honest question... an employee who left the firm after 2013 and wanted to exercise their stock options needed to pay taxes up front on shares they received, based on the company's then $700mm+ valuation. But now the price of those shares is significantly less, based on the $100mm sale price. So they ended up paying more in taxes on their stock than they can receive now from the sale of their stock.
In this case, one of the controversies is that company leadership may not have taken such a low sale price (given that they initially had offers of more than twice that) had they not been compensated with personal payoffs outside of the equity structure.
Right, but the $700m valuation was preferred, and the employees likely paid AMT tax on the FMV (about 10-30% of that value). It's certainly sad but at least they can write off the AMT loss against capital gains if they have any and wish to, or take the $3,000 credit every year.
But that is the nasty part. The taxes were paid up front while the credit will be applied over years. Odds are they had to liquidate something else, borrow money, etc so it's not just the lost equity but the opportunity cost.
There's always the "they knew they could lose it!" line but if the leadership was lying internally and externally, I hope they get sued into oblivion.
The article was stating that the employees who exercised their options didn't actually gain any cash. They paid taxes on the "value" of the shares they received (converting from options to actual stock), and not on any real sweet cash money. I think the point is that for most of these people, even if parts of that loss may be recoverable later on (not sure about that), being out $40k - $100k+ on what was a badly misrepresented liklihood stings against execs getting their preference and bonus pool shares. The incentives did not line up, like their press release conflated.
> How is this a loss? They paid taxes on gains? Not sure what the badness is here. They cashed out and paid taxes.
They didn't take real gains, they took illiquid paper gains and paid AMT (Alternative Minimum Tax).
Example: Strike price was $1 / share, "on-paper" price was $20 / share. Employee had 20,000 shares, with a "paper" gain of $380,000. They had to pay the taxes on those gains even though the stocks were not publicly traded and therefore illiquid.
So they were taxed on a best-effort valuation of the thing they received from their employer? That seems like how tax is supposed to work. (How else would you do it - in-kind taxes?) Illiquid investments are a risk, if you lose money on them then you lose money on them, and you don't get back the taxes you paid, just as you don't get back the taxes on income you lost at the card tables.
Then prices would fall to the point where people could afford their homes, or governments would run massive surpluses and could lower their tax rates to remove the burden, or some combination of the two effects. It would remove the disincentive to trade homes which is bad for everyone: if I live next to your job and you live next to my job we'd both be better off if we bought and sold each other's houses, but at the moment we're discouraged from doing that because our tax bills would come due.
You can't always sell the share after exercise. You're taxed on the spread between strike price and fair market valuation as income on exercise, not on sale.
There is an exception around taxes for ISOs that recently became useful with the AMT change in the new tax law, but even in that case you often can't sell the share after you've exercised it without permission from your private company (which you are very unlikely to get).
What do you mean? If you leave a company you are generally forced to decide to exercise or not within 90 days even though you might not actually "cash out" for years, if ever.
Interestingly, the recently passed tax reform bill seems to make this type of loss less likely - though it would seem to be too late for these employees.
https://www.towerswatson.com/en/Insights/Newsletters/Global/... (see section Private Company Equity Grants)