The idea of owing tax the moment a company goes public seems tremendously stupid. Not a single person I know who's had shares in a company that went public was able to sell them immediately. They all had to hold onto them for some set period, and some of them actually had to pay tax on the gains before they could even sell the shares (to get the liquid capital to pay the tax). Maybe I'm missing something?
Yes you are missing a little detail. He is paying tax on exercising options which he was awarded as part of his salary. He does not owe the money because the company went public but because he chose to exercise the options. He could exercise less options and pay less taxes. And the fact that he can exercise the options usually means that he can sell the resulting shares.
A very similar problem is plaguing Australian companies now. The downside to share-based compensation can outweigh the upside. For example, options would be taxed upon vesting rather than exercise, so there are immediate liquidity issues. Even those that are anti-dilutive for EPS purposes from the grantors perspective (e.g., underwater options) may be taxed.
Yes, you're missing that management gets to choose the "lockout period" before existing shareholders can cash out. Usually, management imposes a 6 month lockout period but exempts management (i.e., board or executives)
Mr. Zuck is management at Facebook.
As for the taxes, you're thinking of the imputed income from exercising options at below the market price of the shares when exercised (i.e., an option to buy a $10 share of PublicCo for only $2 is $8 in imputed income b/c you could then immediately sell the shares for $8 in gains).
It's the underwriters of the IPO that impose the lockout periods, not management. The lockouts apply to all pre-IPO shareholders (excluding shares explicitly included as part of the offering).
Lockouts may also include provisions that any early release granted to management or dominant shareholders must also be granted to all other parties on equal terms; that was true of the one lockout agreement I was subject to.
And management chooses the underwriters, who therefore will conform their requirements to management's demands, as they have here.
Underwriters frequently try to impose lockouts, but its the management who actually sets the terms, which is why some lockouts are as short as 3 months while others are as long as 9 months. There is no requirement that the lockouts apply equally to management/dominant shareholders and other shareholders, though management frequently accept such restrictions b/c its not usually worth the cost to carve out such an exception.
