If you held the preferred shares while you were a resident of California, why shouldn't you be subject to California CGT when you realize the gain in proportion to the length of your residency, just like if it were deferred employment compensation (taxed by CA in proportion to workdays in CA vs workdays elsewhere) or real estate (taxed in full by CA)?

Why should VCs get a tax preference employees don't get?

Yeah, it's weird that in California that if one does an in-kind transaction to obtain options or shares with labor, it's treated unfavorably relative to a cash transaction for the same things. It's a regressive tax: a special case to tax working people more for gains on equity. The normal way to recognize income on equities is at the time of sale.

This is one of a few examples where California's progressive politics haven't lead to progressive policies, whereas states that are much more non-progressive in their politics -- states like Texas -- have, as a practical matter, policies that are much better for working people.

I suppose that, hypothetically, when you purchase shares with cash it's "post-tax" cash; whereas when you purchase shares with labor it's "pre-tax" labor.

when you own shares as a VC it’s because you’re an investor. when you receive equity as an employee it is because it’s compensation.

when you get equity as an employee you’re taxed when you vest and when you sell. you shouldn’t be taxed when you sell by California if you’re out of state.

Well, this point specifically applies to options. Per FTB-1004 (https://www.ftb.ca.gov/forms/misc/1004.html) you will be taxed whenever you exercise, whether you're a resident or a non-resident. Doesn't matter if you're out-of-state for a particular tax year.

It is not really correct to cast this in terms of owing taxes on income in the state that you earned it because options are not income. There is a non-symmetry here with financial options generally: if you lived in California and bought some options, then left the state, and then, as a non-resident, exercised the options and sold shares, you would not be taxed in California because there was no income in California. Income on a stock transaction is generally recognized at the time a security is sold. Obtaining options and stocks both represent an outflow of money, not an inflow. It's a regressive policy to treat options purchased in-kind with labor in an unfavorable way, with regards to taxation, relative to those purchased with cash.

Ok but tech elite here aka VC investors aren’t getting options when they invest.

So this tax question doesn’t apply to them. Rabois can move to Miami now and if he sells his IPO shares next year he owes California nothing.

Well, VCs do sometimes get options -- that's what convertible debt is. Usually options are not treated as compensation, though.

It is likely that Rabois has a mix of compensation from his firm, as a practical matter, and some of it is likely to be options -- but even if not, Rabois and people like him have paid a lot of taxes in California. A lot more than they would have paid in most states. When you consider how much they paid relative to how well the state government has provided services -- taking other states into consideration -- it's hard to see how the people moving are betraying anyone. They paid and paid and paid.