Regarding Ownership Distribution


2

When vesting ownership shares to founders/employees, isn't a taxable event created without realizing cash income? In this case, as you build the company and create more value in the shares, don't founders then become responsible for an increasingly larger tax obligation at each vesting period without actually realizing cash for that increased value?

Do you have any thoughts on how to work around that?

Equity

asked Apr 26 '11 at 02:27
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Ben Anderson
11 points

2 Answers


1

Actually, no.

If the shares are ISO (Incentive Stock Options), the taxes are realized when you sell the shares and not when you exercise the options. For NSO (Non-Qualified Stock Options), the taxable event is when you exercise the options.

Most startup employee stock options are ISO's and do not have a tax burden until the options are sold. Since they are restricted, selling them only happens at a liquidity event.

Once they are exercised and sold, the founder/employee will have to pay taxes on the gains (Sale Price - Option Price). You do not pay taxes as the options vest unless you buy the options and they are NSO's. Then, you have to pay taxes on the Fair Market Value - Option Price but most people don't do that.

answered Apr 26 '11 at 22:22
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Jarie Bolander
11,421 points

0

If you're talking about share options then Jarie is right and there is no tax obligation till they exercise the options.

However, if you're talking about actually vesting shares, then yes there is a tax obligation at the time of vesting.

I like pointing people to this great Deloitte FAQ that was built for Amazon (it's really to read): http://public.deloitte.com/bdc_marketing/amazon/faq.html

answered May 13 '11 at 08:10
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Joseph Fung
1,542 points

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