Feb 28, 2020

Axios Pro Rata

By Dan Primack
Dan Primack

🎧 Pro Rata Podcast digs into the practical politics of fracking, ahead of Super Tuesday. Listen here.

Top of the Morning

Illustration: Sarah Grillo/Axios

I really didn't want to write about politics again today, but I also wasn't expecting a leading presidential contender to propose a plan that could upend startup employee compensation.

  • Driving the news: Sens. Bernie Sanders (D-VT) and Chris Van Hollen (D-MD) introduced legislation that would tax nonqualified stock options at vesting, rather than at exercise, for employees making at least $130,000 per year. The impacts would be felt most by select employees at privately-held companies who'd be taxed on monies that they haven't yet banked.

The legislation, which you can read here, is officially designed to "end tax advantages that allow CEOs to contribute unlimited amounts to special executive retirement plans," with proceeds going to "shore up multi-employer pension plans for 1.7 million workers." Startup employees are collateral damage, much like they would have been had similar language not been stripped from the 2017 tax bill.

What to know:

  • This only applies to employees more than $130,000 per year and vesting more than $100,000 worth of stock per year.
  • That means it would be most likely to impact employees at later-stage startups, where the strike prices are higher.
  • The proposal doesn't have a grandfather clause, but does include a nine-year transition period (i.e., this wouldn't apply until paying 2029 taxes).

Why it matters is that many of the affected employees, even though well-compensated, may be unable to afford the taxes.

  • Imagine you make $130,000 per year at a privately-held company and have $200,000 worth of annual options vesting.
  • You obviously are required to pay regular taxes on your $130,000 income, but now also must pay taxes on $100,000 worth of stock options (again, the first $100k is excluded).
  • Or, put another way, you make $130,000 but are paying taxes on $230,000.
    • Not only might you not have the cash, but there's also the possibility that the stock will later go to zero or liquidate lower than your strike price — but the bill includes no claw-back mechanism. So you've now paid taxes on money you never saw.

Tax attorneys tell me that this legislation would likely result in companies shifting more from stock options to restricted stock units (RSUs), and also changing vesting periods to quarterly or yearly (because paying taxes monthly would be an administrative nightmare for both companies and employees).

  • But there are negative consequences to both: Companies typically provide fewer RSUs than options, because there's no strike price, and longer vesting periods could result in unhappy employees feeling compelled to stick around longer than they otherwise would.

Sources close to the legislation tell me that there could still be tweaks to the language, so don't be surprised if all of this gets addressed. Particularly given that a top Sanders campaign advisor is Rep. Ro Khanna (D-CA), whose district includes such Silicon Valley burgs as Cupertino and Sunnyvale.

The bottom line: This isn't how much people pay in taxes. It's about when they pay it. It would make more sense for the timing to match the receipt.


Illustration: Aïda Amer/Axios

Thyssenkrupp of Germany agreed to sell its elevators unit for $18.7 billion to a consortium that includes Advent International, Cinven, ADIA, and the RAG Foundation.

  • Why it's the BFD: This is Europe's largest buyout since before the 2008-2009 financial crisis.
  • Marketplace: The winning price approximated a bid from Finnish strategic Kone, which was hampered by German labor concerns. It was higher than a rival private equity offer from Blackstone, Carlyle, and CPPIB.
  • Bottom line: "Once an emblem of German industrial prowess, Thyssenkrupp is fighting for survival. The company has been bruised by a slowdown in Chinese and German manufacturing, rising pension costs and falling demand for European steel." — Bloomberg
Venture Capital Deals

Veev, a San Mateo, Calif.-based developer of smart home materials and systems, raised $85 million in equity funding from Zeev Ventures and Lennar Ventures. http://axios.link/jLuP

Lendio, a Lehi, Utah-based small business loans marketplace, raised $55 million in Series E funding. Mercato Partners led, and was joined by Napier Park Financial Partners, Comcast Ventures, Blumberg Capital, Stereo Capital, and Runa Capital. Lendio also secured $24 million in debt from Signature Bank. http://axios.link/uKEP

Tempo, a San Francisco-based connected home fitness system, raised $17.5 million in Series A funding from Founders Fund, Khosla Ventures, DCM, and Bling Capital. http://axios.link/q8Gf

🚑 AxialHealthcare, a Nashville-based healthcare optimization startup focused on substance use issues, raised $15 million from return backers Oak HC/FT, .406 Ventures, BlueeCross BlueShield VP, and Sandbox Advantage Fund. www.axialhealthcare.com

Private Equity Deals

The Blackstone Group invested in Dealpath, a San Francisco-based provider of real estate investment and portfolio management software. www.dealpath.com

Regions Bank agreed to buy Ascentium Capital, a Kingwood, Texas-based equipment finance lender, from Warburg Pincus. http://axios.link/RJEs

Public Offerings

Lion Air, an Indonesian commercial carrier, is delaying its $500 million IPO plans due to global stock market tumult, per Reuters. http://axios.link/0jvU

🚑 Passage Bio, a Philadelphia-based developer of gene therapies for rare CNS disorders, raised $216 million in its IPO. The company priced 12 million shares at $18, versus original plans to offer 7.4 million shares at $16-$18. It will trade on the Nasdaq (PASG) with JPMorgan as lead underwriter, and had raised around $225 million in VC funding from such firms as OrbiMed (14.9% pre-IPO stake), Versant Ventures (11.3%), Frazier Life Sciences (10.6%), LAV (5.8%), Vivo Ventures (5.3%), and New Lead Ventures (5.3%). www.passagebio.com

ZoomInfo, a Vancouver, Wash.-based data platform for sales, marketing, and recruiting, filed for a $500 million IPO. It plans to trade on the Nasdaq (ZI) with JPMorgan as lead underwriter, and reports a $78 million net loss on $293 million in revenue for 2019. Backers include The Carlyle Group and TA Associates. http://axios.link/bFfu

Liquidity Events

DocuSign (Nasdaq: DOCU) agreed to buy Seal Software, a Walnut Creek, Calif.-based provider of contract discovery and data extraction solutions, for $188 million in cash. Seal had raised nearly $50 million from DocuSign, Toba Capital, Advent Venture Partners, Greylock, and Kreos Capital. http://axios.link/u0M1

EQT Partners is considering a sale of In.Corp Group, a Singapore-based corporate services provider that could fetch “several hundred million dollars,” per Bloomberg. http://axios.link/6HTW

More M&A

🚑 BDMS, Thailand’s largest hospital operator, offered $3.2 billion to buy the stake in Bumrungrad Hospital that it doesn’t already own. http://axios.link/5dgD

🚑 Gilead Sciences (Nasdaq: GILD) approached Menlo Park-based cancer therapy company Forty Seven (Nasdaq: FTSV) about a possible takeover, per Bloomberg. Forty Seven shares jumped over 30%, giving it a market cap of $2.34 billlion. http://axios.link/F3Fe

Public Storage (NYSE: PSA) is the only remaining bidder for Australian self-storage operator National Storage REIT (ASX: NSR), after both Gaw Capital Partners and Warburg Pincus dropped out. PSA’s offer is A$1.89 billion. http://axios.link/rFA7

It's Personnel

Kate Castle joined Victress Capital, a VC firm focused on female founders, as a partner. She previously was a partner and CMO at Rethink VC. www.victresscapital.com

Final Numbers
Source: Refinitiv. Data through Feb. 27, 2020.
Dan Primack

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