Following its Friday initial public offering of stock, online game developer Zynga is positioned to become the first company to benefit from San Francisco’s recently adopted tax break on the sale of stock options.
Yet The City also could benefit from the company’s IPO by setting a record for option-related payroll tax revenue from a single company.
Earlier this year, Zynga officials said they would consider moving out of San Francisco unless The City adopted a payroll tax break before the company went public. That event finally occurred Friday, when Zynga’s shares debuted at $10 apiece on the Nasdaq stock exchange and rose to a high of $11.50 before dropping to close at $9.50 per share.
Under a recent modification of The City’s payroll tax, Zynga could pay a maximum of $750,000, or 1.5 percent payroll tax, on the first $50 million of stock option compensation that its employees receive whenever they sell their shares in the company.
However, there is one exception. Zynga’s tax rate would be higher if its employees had ever sold more than $50 million in stock options per year before the company went public. In recent years, the private market for such pre-IPO shares has increased dramatically.
If Zynga’s employees had sold more than $50 million of pre-IPO stock options in a single year, then Zynga’s maximum tax rate on stock options would be a sum equal to 1.5 percent of that amount.
As far as city officials can tell, no company has ever had a $750,000 tax bill on stock options. “No technology company in San Francisco has paid more than $685,000 in a single year in stock option taxation in the past 13 years,” said a May 3 economic impact report from the City Controller’s Office.
But that estimate is not exact, because tech companies typically do not disclose what portion of their total payroll tax bill applies to stock options and what part applies to other forms of employee compensation.
Economist Ted Egan of the City Controller’s Office said the new tax break on stock options was intended for “mega IPO” companies. “It all depends on what they end up being worth,” Egan said on whether the tax break would benefit Zynga. “It may not matter for them.”
At the time the tax break was drafted, it was thought Zynga would be valued at $20 billion for making popular online games such as “FarmVille” and “Mafia Wars.” But following Friday’s less-than-hoped-for stock price appreciation, the company’s value was reported at slightly less than $7 billion.
Supervisor Mark Farrell, who advocated for the stock option tax break, believes the reform will still make a difference for Zynga. Farrell said he would imagine that the value of company stock options sold by employees will come in “well above” the $50 million mark.
It’s mostly speculation at this point. According to the tech website GigaOm, Zynga employees may not exercise their stock options and sell their shares until May 29.
1.5% San Francisco’s tax rate on company payrolls
$685K Most a company has paid in payroll tax on stock options in the past 13 years
$750K Cap a company pays on stock options if it goes public
$390.6M Estimated business tax revenue for fiscal year 2011-12