stage three, immature stage, the company is still enoccurring payroll tax expenses associated with stock options but it's smaller because once the i.p.o. has happened, the company is granting stock options at the value of the publicly traded stock. and so in this case, the stock is still going up and so people are still making profit exercising those stock options but it's not nearly as much. you can think of stage two as going from, you know, your option is a dollar a share and company is trading at $60 a share and you're making $59 a share. the second stage maybe the stock has gone up from $60 to $70 and maybe you're making $10 a share. i think that's a typical experience of a successful technology company. i should also say at the outset that the number of companies that even before supervisor mirkarimi amended his legislation that would be affected by this is very small. there are a lot of technology start-ups in san francisco and they generally all grant stock

options. but it's really only the ones that experience an i.p.o. or get acquired by a public company ever have those options worth anything. you know, i work for a technology company in the late '90's and stock was never worth anything. and most of them were that type of a company. it's an incentive but the incentive doesn't always pay o this is an exclusion that will only kick in and effect a prei.p.o. technology company that is successful enough to get to that i.p.o. stage and it only excludes the stock options that they granted before the i.p.o. because that's where the bulk of the payroll tax differential will come from. so that's my best description of what the legislation does. in terms of the cost and the benefit, as i say, because we don't have great data or any data really on what companies actually paid, it's hard to estimate but the treasure's office did provide me with the tax paying history of 14 companies that went public so i was able to look what they did

before they went public, the year they went public and the year after. based on, that i was able to estimate the amount of additional tax they paid that you could attribute to stock options as opposed to just the growth of head count averaged about $140,000 a year for these 14 companies and the most that any company paid in one year was about $685,000 a year. so if this was $140,000 is an average i.p.o. in san francisco and that's the case for the past 13 years, if we have two to three i.p.o.'s a year, which has also been an average rate, it could cost the city about $750,000 a year on average. now supervisor mirkarimi, he told you introduced this idea of effect irving criming to the policy, which is no company can take advantage of the exclusion unless they're paying up to $750,000 already. the most we have ever seen any company pay is $685,000. so none of these companies in the past 13 years would even

qualify under supervisor mirkarimi's amended legislation and that's why i told the budget and finance committee for all intents and purposes, the cost of the amended legislation over the past 13 years would be zero. because no company i could find would have qualified. none would have paid the maximum $750,000 above which it gets excluded. if you're talking about a company like zinga, which is also valued now in the upwards of $5 billion range, then if they had an i.p.o. in the next year or two could very well be in that category where they would be owing more than $750,000 and, therefore, they would be taking advantage of the exclusion. but i think that's why we said it was a very efficiently design policy. it is focused on very few number of companies who have a very, very big tax differential between san francisco and nearby locations. it is not trying to -- this particular legislation is not trying to reduce the tax payment of every company that goes

public. particularly as it's been amended. >> in terms of the benefit, there have been a number of companies that were based in san francisco, publicly traded technology company that's have left. that does happen. we found 43 of them and in almost every case they left within a few years of their i.p.o. we don't know how many left because of the payroll tax and it certainly is there is true that those who left didn't necessarily owe more than those that stayed. i was looking for that. i wanted to say the ones that stayed paid little in stock options and the one that left would have paid a lot? it doesn't work that way. but i think it is fair to say the bigger your risk of paying -- the bigger your payroll tax payment associated with stock options, the bigger risk you are. i think it's reasonable to take a look at twitter, for example, and say if it's a $1 million difference between san francisco and san mateo county, maybe we don't need to take any action.

if it's 25 million, maybe it's a very clear indication that it's better for them to move and, therefore, it's a different rational for making a policy change. i believe supervisor mirkarimi ran through his amendments which closely reflect the recommendations in our report, making it a six-year exclusion. our office in conjunction with the treasurer's office will be doing a review of the legislation after five years and presenting that to the board of supervisors as they decide if they wish to continue it after the six-year period and our report would basically look at the reflection of it. it includes all i.p.o. stock options. the main two thing that's limit the legislation and make it very efficient are, first, it's only the pre-i.p.o. stock options. again, it only applies to start-up companies that do eventually go public and even

so, they will pay up to $750,000 in tax related to stock options before the exclusion kicks in. just to sum vies, the legislation has the benefit of protecting the city against the risk of very successful technology companies leaving to avoid having an i.p.o. event in san francisco, while, at the same time restricting the policy to a very, very few number of companies and, therefore, minimizing the loss to the general fund. happy to take any questions. president o'brien: thank you very much mr. egan. i think at this point we should go first to public comment -- or to commission remarks -- >> commissioner questions first. president o'brien: anybody have any questions at this point? >> for mr. farrell.

i just wanted to ask, do you have a feeling of how many companies here in san francisco that are public have left because of their continuing to pay stock options? >> right. i think mr. egan as you mentioned before, i think it's impossible to tell how many of those have left over the past number of years to track them down. what i would tell you in anecdotal evidence in terms of research so what we've all been doing right now is public companies are actively placing head count elsewhere outside of san francisco. is it specifically related to stock options? i think it's more of a cumulative issue about their perception of the overall economic environment in san francisco. but they will actively tell you they're buying office space outside of san francisco and trying to add head count outside of the city when possible. >> thank you. >> just a followup on that then. if you're going to, for future

public offerings and you're not going to have a tax on those, do you anticipate that you're going to drive out more of the larger in 2010/2011 payroll taxes that they're currently seeing if their neighbors pay zero? >> no, i think that's a great point. quite frankly, originally i was a little more aggressive in my intentions of basically eliminating it all together and a lot of dialogue and officiating here in city hall and budgets in our sing narrow right now we don't want to create a budget deficit, for instance, based on what we collected last year. i have spoken and reached out to any number of them and their c.f.o.'s and c.e.o.'s and their representative bodies to say at a minimum, would you support getting on board from paying to what you paid to this date, but at least having the security going forward and the understanding city hall is looking out for you as well, that this policy is going to

talk about all companies here in san francisco. they were on board with that. actually, they need to be commended for that because regardless right now we're going to be talking about a two-tier type of structure here in san francisco. whether it be any of the popular companies now that can go public in the next year or two under either of our scenarios, we're going to have one company that is paying far less than the other company. and i do have an interpret problem with that. that being said at a minimum we want to create security for all companies now about what they're going to be pay going forward. so that was my approach. president o'brien: any other questions, commissioners? >> you mentioned that you want to exclude even public companies from paying the payroll tax for stock options? >> we're going -- my legislation is designed that the higher of

2010 or 2011, whichever year they paid more payroll tax attributable to stock-based compensation, that would be their maximum going forward. to existing public companies would continue to pay very much and continue to pay into the future. >> how many of these public companies you say will fall under the small business category? >> i would think very minimal. but what i do think is these larger public companies employ a ton of people here in san francisco that allow small businesses to be created in our city. all of the ancillary small businesses support jobs and all of the ancillary things that come out of employing people in larger companies here in the city, which is why i think it's important, from my perspective, to create a city wide perspective. president o'brien: commissioner o'connor? commissioner o'connor: how are you? i supported the twitter tax break for the reasons which you just stated, which is i wasn't

so concerned with twitter, although i think it's great to see the furniture mark building filled with workers who are going to support all of the small businesses and revitalize that area, which has been struggling for a long time. we all know that. however, having said that, the idea that this city could enter into a quasi partnership in supporting and keeping developing companies staying here with the caveat that we would as a city share a potential gain when that company did go public, that's very attractive in lieu of these payroll stock options that are going to be taxed, correct? but what -- you are against this? >> i'm sorry, maybe you can clarify a little bit.

commissioner o'connor: i apologize, i got here a little late. i was on public transportation and didn't get to hear mirkarimi's presentation. >> it was great by the way. commissioner o'connor: the issue at hand is there's a potential for the city to gain revenue when a company does go public by taxing the income that individuals are making at that public offering, correct? >> absolutely. what we're talking about, what we're all focused on right here is the specific portion of our payroll tax, which i believe mr. egan talked about and we all know, we do not call out the difference between payroll tax or just head count salary versus stock-based comp. so we're only talking about is a sliver according to stock-based compensation. the additional part about being able to tax companies with salary head count or head count salary, absolutely, that exists still.

>> i'm going to digest a little bit more. >> commissioner? commissioner kasselman sclon i'm going to throw out the idea it's great you're helping large businesses who are already here go public and have the tax break but it would be nice for small businesses who are maybe hearing about this to say now is a great time to go to san francisco but i'm in the incubater phase. i'm not ready to go public but i might be in ten years to grandfather them under the clause of, whatever, the legislation that would say not ready today but i'm going to make the investment in the city to stay there and see this through and keep them here too. >> i completely agree with you. i think our goal and our focus here in city hall should be creating that environment where people want to come, want to locate here because of the other companies that are here, because of the employee base that exist because of our national city in what we have to offer. my legislation, this is a permanent going forward so that does -- and i think that's a principle difference we can talk

about. president o'brien: collisioner clyde? >> thank you, supervisor farrell. the intent, it's very clear, i do, however, want to know how do you replace your lost income? because if this exemption applies to all companies public and private going forward, for instance, i believe we have for our frotional attorneys and doctors, really high earners, $300,000, $300,000, $500,000 earners, i believe there's a cap or some kind of exclusion to help those very highly paid professionals deal with our 1.5% payroll tax. now, i may be wrong, but i just feel uncomfortable with a complete exclusion, and that --

>> sure. let me just say two things. first, i absolutely believe and i believe has been brought out in the last few months we need comprehensive reform of our tax system. lock, stock and barrel, that has to happen. when you talk about an exclusion, again, public companies today, we are going to continue to get the same amount tomorrow as we did yesterday. it's we're not going to get more. from my perspective again, it's recognition on the city's behalf once we realize because of this twitter debate, we're the only major city that does this, we said oh, gosh, we have to stop, we want to protect our baseline but we don't want to continue to gain more revenue off of that going forward in the years forward because we understand we're the only city that does that. if we continue to do that and continue to articulate we should be doing that, companies, i believe, and their investors are rightfully going to look at san francisco and say this is not an environment i want to be part of. that's my fear and that's what my legislation was designed to protect against.

commissioner clyde: i will be looking forward to the report so we can continue the discussion. president o'brien: commissioner o'connor? >> commissioner o'connor: i would be interested in asking supervisor mirkarimi a couple questions about this. president o'brien: go ahead. >> why don't we do a handoff? >> i appreciate the discussion. a couple things i would like to point out -- president o'brien: i think he has a question. >> i would like to hear the rebuttal, there's competing legislation. president o'brien: the question? >> what is your response to the topics of discussion we have just been having? >> kind of anticipating where the conversation was simmering. i don't know if you're competing but we are at different periods of time where i think were more right for us putting our legislation forward for two

specific reasons that makes supervisor farrell's legislation much different than me. one is his is a perpetuity, eternity. that is impossible for us i think to provide the kind of analysis that our controller said is just not prepared to do so compared to ours, which is a six-year time window, and ours are, as i said earlier is defined by a very discreet population. now since the twitter tax deliberation had -- had implicated both payroll tax and stock option, what we sliced off was just on the stock option set because it is that genre of companies on the prei.p.o. that we have the greatest amount of information on, even though it might be a small number, not sexy in the sense of sweeping citywide reform but enough evidence to at least give us a

complete yard stick as to what we can anticipate through the loss of those companies and the gain of keeping them here and tradeoff of them getting -- two very specific differences. i just want to say i'm very open minded to the legislation i hear being advanced by supervisor farrell. but in this day in age, when i hear somebody like peter darby, the c.e.o. of pg&e, who is exiting with a $35 million stock option bonus and is not taxed, that doesn't agree with me. i'm not going to support something that would give somebody like peter darby that kind of free ride from pg&e with a $35 million stock bonus that he gets as an exit. should that be applicable to somebody or somebody like him. so those i think matters would need to be reconciled for something that would be a sweeping legislation that would be addressed on the eternity level and perpetuity, which is why i like the stepped process.

and that is where legislation is different because it is on a very stepped process. president o'brien: council member kasselman? >> i just want to ask you the question i asked supervisor farrell to grandfather small businesses that came into san francisco in the next year or two who might come because it's attractive that this is a great opportunity for them not to pay tax on their offering but they're still seven years out from going public because in the start incubater phase. is there a way to look at the small businesses to say, you come in, and sign a release coming in 2013, you're ok. will you make an exception? >> that's the hook. the hook is the six years doesn't mean it can't be renewed and extended beyond that and

successive government and board of supervisors and mayor can do that. so the six-year period but the gage is the fact it was a five-year average we look at as to why we fix that six years. chances are this is something we may do in perpetuity such as what supervisor farrell i think is intimate what he suggested. but if it's just on the pre-i.p.o. in that genre, that's easy to be extended. president o'brien: ok, commissioners, anybody else from the commission have any questions? no. ok, i think we should open it up for public comment. >> thank you, appreciate it. president o'brien: that's ok. do we have any public comment on this issue, please? come forward. >> good evening, ladies and gentlemen. my name is paul courier, and i'm a candidate for mayor in 2011, and this issue of payroll tax

and income tax on payroll base and stock option is very familiar with me. i had a company called the communication bridge global, our wireless antenna towers are the hotel, we lit up, packed out the park before at&t now, before they knew what wireless season it was. i'm familiar with being an early mover. my business mentor has grinned and taken over 500 companies through the i.p.o. process with hambert and quinn. i'm familiar with this. richard rizotti was my law firm, and they're the premier law firm 234 in palo alto through the i.p.o. process. if you have not been through the i.p.o. process, it's a wild ride. many businesses have done it in the bay area and california, netscape for one, sun

microsystems, cisco, on and on and on. san francisco is blocking itself from participating in this gain, end of story. it's that simple. and i'm not for or against any of the specific legislation that is now being groomed and will go through the process of acceptance. i'm speaking to the principle of we need to eliminate payroll tax and we need to start looking at gross receipts tax for revenues in san francisco. and that's one of the reasons i'm running for mayor. we need to go ahead and set up a county-owned bank, model it after the bank of north dakota that's publicly owned. that would generate $300 million to $400 million revenue immediately in financial services for san francisco. we need to have a public owned benefits company that provides the angel funding for the twitters and future companies that are coming through san francisco to get their finance capital right here from the city and county of san francisco and

lets us participate. right now the angel community where i grew up now takes the bulk of the funds. why don't we get $5 billion when the next twitter goes public? why don't we do that? are we brain dead? seriously. and the last issue is this issue of pensions that's percolating all the way along. thank you very much for your time. president o'brien: thank you. do we have any further public comment? ok. i would like to just make a couple -- sorry, commissioner clyde? commissioner clyde: after you. president o'brien: ok. so clearly there's an agreement that taking away tax ordinance is a good thing, and that's

obviously something that's agreed to by everybody because we're all agreeing to do something that reduces the tax being paid to do business in san francisco. and we're always complaining up here on the commission on a regular basis about the fact san francisco is one of the most expensive places to do business and how difficult it is to be an entrepreneur in san francisco and for me personally, the last taxation that -- less taxation we have, the better and the more we rely on people to take care of themselves, the better. it's just a fundamental, philosophical argument i have, just a comment i will make. commissioner clyde? commissioner clyde: thank you, commissioners. i just want you to know i'm in support of supervisor

mirkarimi's legislation at this point as written just because he's really protecting, i believe, the impact to the general fund. it is a very nuanced piece of legislation and it does set a per employee base or -- a base of per employee base or cap. and i like that, the $1,500 per person because really the intent of the payroll tax is to reimburse the city for the cost of providing services to employees in san francisco. we have to have income from businesses to do that. the cost of providing services to the businesses, there has to be a formula, really, a business tax formula. it's true we have a broader business tax discussion, that the city has to engage in and that will be at the ballot box and i'm looking forward to that. but we can't know when those ballot measures will be crafted. we don't know if any will be passed or in what form.

so a time, a time certain is something that i believe is extremely important when crafting this type of tax legislation. i just want to offer that up, that, you know, we do have costs, we do need to have fairness in the taxation and it's very difficult to look at brick and mortar businesses, bakeries and, you know, different manufacturing, our light manufacturing paying full freight and working very, very hard to keep going and we're crafting legislation and policy for some of the wealthiest people in our city and it's difficult to look kind of back and explain, well, yes, this is positive, it's positive going forward. we have high-income employees spending money here, investing here. they do have their contribution other than the payroll tax. but i do support supervisor mirkarimi's legislation at this

point because, you know, he is not eliminating payroll tax and he's on even the options part. the payroll tax -- you might clarify that a little better, but -- >> thank you. everything you said was spot on. it's just that we amended the legislation so it's not the $1,500 per head but $750,000 ceiling which the controller had opined, this is much more progressive and beneficial to the city by sup planting the two. that was the amendment he was referring to. so you're speaking from the original legislation that had been amended. >> ok, the $750,000 ceiling is per employee? >> no, no, no. >> commissioner clyde: that is for the entire company? >> that's right. commissioner clyde: but you feel that is an adequate compensation to the city for -- >> very much so -- commissioner clyde: and respects the intent

with the payroll tax. >> with the treasurer, tax collector and controller felt this was a more effective way to go and that is what our legislation was amended to. but everything you said was right up. >> commissioner clyde: thank you for the collarification. i would like to add on supervisor farrell's legislation, which is provided now, i have to say i appreciate the elegance of it, the simplicity of it. i am concerned about it being open-ended on the time line precisely because of the difficulty in changing the payroll tax and how -- my concern is how we will replace the lost income. we won't know until we get the controller's support and impact. but i do appreciate legislation that is broad based and is very elegant actually. thank you. president o'brien: commissioner o'connor? commissioner o'connor: point of clarification, not to be argumentative but you used the

word we as a commission are opposed to raising taxes, et cetera, and i would have to just add that i'm not opposed to raising taxes. i'm proud to pay taxes. i'm proud to create jobs. i own five businesses. i'm opposed to the city not being run correctly. i'm opposed to wild pensions. i'm opposed to companies, larger corporations not paying their fair share, but having owned and operated small businesses in other cities and other small business owners here, we are proud to be in san francisco, and san francisco gives us an unfair playing advantage because it's better to have a small business here in a lot of ways because there's higher density, there's more people active, there's more people out and about. there's certainly more tourists. and in compared to my business in oakland, i can tell you it's far easier to do business in san francisco when it comes to