Yes, your first sentence is an especially pithy way to boil down what I wrote.
When I said that "I don't necessarily buy this argument", I didn't mean that I necessarily disagreed with it either. TBH, I remain uncertain.
It's interesting that you compare founders/GPs/LPs without bringing up employees. They also risk their time and, in a majority of cases, will not receive preferential tax treatment.
Employees invest their time for immediate pay off (they get paid twice a month, monthly or something like that typically) So in essence, this is short-term capital gain which is taxed at the same level as regular income.
When speaking about employees, I was talking about startup employees who take a significant % of their compensation as risky stock options. My point was about this portion of their compensation.
Aren't employees get a same long-term capital taxation treatment on profits from their shares for their risk of taking part of the company in exchange for their time?
Startup employees generally get equity in the form of stock options. In order for employees to get preferential tax treatment on these options they have to exercise these options at the time they are granted (which can require a large outlay of cash) and then hold them for at least one year.
Due to the cost and risk of this exercise, most employees do not do this. Instead they wait to see if the company becomes more valuable (and liquid) and only exercise the options if so. At that point any realized gains are taxed as ordinary wage income.
There are a great many resources online on this topic if you are interested in more details.
sounds like a pretty bad deal... I am glad I never accepted stock options in lieu of compensation.
EDIT: after reading more about it, it actually makes sense. What really employee is getting is an "option" similar to one can buy for publicly traded companies. And whatever option price is already reflected in employees tax situation - it is an actual expense which lowers tax base by the cost of this option.
Now - the cost of that option (i.e. different between full salary and limited salary when getting options) is something that can be very incorrectly priced (which I assume is the case in the majority of startups)
So it is not tax code discriminating against these employees. It is actually employers taking advantage of these clueless employees.
From a strictly "expected value" calculation you are probably right that in many cases startups are getting a pretty good deal when they get employees to trade salary for stock options. It's hard to say if this qualifies as "taking advantage of these clueless employees" though.
Certainly it is in some cases, but in others the employees could have a high enough risk tolerance that it is a good deal for them.
In addition employees also often make career decisions on factors that are not purely financial. This is also a perfectly reasonable thing for people to do.
From what I read typical stock option results in about 50k per year extra if company succeed. Chances of hitting that are really really small. So risk/reward doesn't seems to be right.
As for non-financial reasons - this is 100% valid point. But then why we are talking about non-fair taxation? Stocks come into picture only when employee exercise (at a nominal price on the moment employee was hired) The same would apply if you use regular options for the publicly traded company on RobingHood for example.
When I said that "I don't necessarily buy this argument", I didn't mean that I necessarily disagreed with it either. TBH, I remain uncertain.
It's interesting that you compare founders/GPs/LPs without bringing up employees. They also risk their time and, in a majority of cases, will not receive preferential tax treatment.