Our perspective depends on the relative value/scarcity of capital.

If capital is scarce and valuable, it makes sense for a system to be designed to reward and protect capital risk.

But the "standard terms" haven't changed much since the 80's and capital is definitely more abundant today than it was before. Valuations for early companies are ~10x what they used to be decades ago. Founders give up a fraction of ownership compared to what they used to.

The question is where the right balance point is given current parameters.

Also, wages have never been higher for tech employees. I'm happy to have a 2x wage level conspared to 15 years ago rather than have the same wage but 2x equity (obviously a simplification), so something's at least working well here wrt labor gaining some ground on capital.

There are two different things going on here though - one is whether we offer incentives for investors.

The other is how the tax system works when people receive options / equity.

The problem with 'receiving' equity is that 1) Current laws treat equity as if it was cash - but it's not. 2) Whether employees should be compensated and recognised for their potential opportunity costs - essentially given a similar deal to investors.

Keep in mind that many startups will offer equity in lieu of the salary that they would otherwise command.

Also, if you're offered a significant portion of equity in a startup, then taxes currently make a large disincentive for people to accept and join the startup.

I definitely think (1) is in need of reform.

Could you elaborate on (2) on what you mean by "given a similar deal to investors"?

on 2) I think if investors are rewarded for the risk they take, then other stock holders should also be rewarded for the opportunity cost they've sacrificed. So specifically, in terms of 'a similar deal' I'm talking about tax incentives.

At the very least, I think tax shouldn't apply until you cash out - this just makes sense.

Perhaps the system could also offer a tax incentive for lower returns for non-investor shareholders to recognise sacrificed opportunity cost as well.

Some countries let you pay taxes on liquidation, others demand to be paid on receiving something, despite it being impossible to liquidate. The USA is the second kind of country with AMT, and that is the fundamental problem.

One good thing that may come out of a Trump tax reform for startups is a repeal of the AMT.

Obviously rife with other consequences.

The US is probably the worst in this respect, and I heard Canada is quite bad, but most of European tax systems follow the "pay taxes only when money comes your way" principle, which puts all investors on equal footing.

On the other hand, if you are lucky enough to work somewhere in the UK that grants options, those options are likely void the moment you leave the company so this entire discussion wouldn't even take place.

I've been granted options twice, both times essentially designed to stop people leaving during a rough period. Given how few UK startups float it wasn't much of an incentive!

In Japan you owe taxes when you vest options (not even exercise!!) Which is even worse.

That doesn't sound right. It should be when you exercise the options or when you sell the stocks:

> Basic taxation of stock options depends on whether they are qualified stocks or unqualified stocks. The qualified stock option is not subject to Japanese income tax until it is sold, on the other hand the unqualified stock option is subject to Japanese income tax when it is exercised and sold.

http://tk-tax-accounting.com/en/english-taxation-of-stock-op...

We spent a bunch of money and time getting this right for cross border options. YMMV.

Might be because foreign options cannot be qualified. IANAL.

What is the trap / bad part in Canada?

Taxes on income (share value - option strike price) become owing on option exercise.

If the company is not a CCPC (Canadian-controlled private corporation) and the option strike price was less than the share value at grant-time, you may qualify for a 50% deduction (bringing it in line with capital gains), subject to some conditions (arms-length dealing, etc).

If the company is a CCPC, you can defer the taxes until the shares are sold. If sold within 2 years, you pay full income tax. If sold after 2 years of holding, a 50% deduction applies bringing it in line with capital gains. CCPC status of options are grandfathered in so if the company loses CCPC status (e.g. bringing in US investors), your options continue to qualify.

Keep in mind that going bankrupt/company sale are forced sales of your shares, which could hit you with a big tax bill and since that tax bill is income (not cap gains), the capital losses of the sale cannot be used to offset it! If you find yourself in this position, you should contact the CRA. They have forgiven these kinds of errors in the past (Nortel employees, JDS Uniphase) with a special treatment of the gains/losses. No guarantees though.

CCPC employees should also look at the lifetime capital gains exemption (LCGE) of $750000 to reduce taxes on the capital gains following exercise, and the allowable business investment loss (ABIL) which can be used to halve the tax owing in the downside case. In theory, the 50% deductions mentioned above and the ABIL stack to reduce the tax owed to 0. The ABIL can only be claimed if the company is a CCPC when it is wound up; so it's possible to lose the ability to claim the ABIL if e.g. US investors come on board later and get a majority of the company.

All these rules make perfect sense assuming there is easy liquidity, but it's a mess for illiquid shares.

When you exercise your SO, you need to pay taxes, based on current price of shares, even if you don't sell them right away. SO is a joke in Canada.

I fail to see how that's different from the US. Stock option exercises of vested shares are taxable here, too.

Last time taxes came up, some canadians described the traps. I don't remember but I'm sure they'll be here again....

The main trap I'm aware of is that exercising a stock option is considered employment income of the difference between strike and exercise price, but selling shares is considered capital gains/losses on the change in value.

So, if you exercise some options, it'll trigger a tax bill on the income. No problem, at tax time you can either pay cash or sell shares to cover. But if in the meantime the company tanks and the stock drops to zero, that's capital losses and doesn't cancel out the tax bill on the income.

Basically you want to exercise only when you're able to sell right away.

http://www.theglobeandmail.com/globe-investor/personal-finan...