Why kill stock options and RTUs?

Dear Congress,

There are many good tax reform issues in both versions of the tax plan. The top marginal rate for corporations has to be lowered. Good job on that. At the same time, US companies do not come close to paying the most taxes of any industrialized economy, so borrowing $1.5 Trillion from our children — $1.2 Trillion of it to provide corporate income tax cuts — seems to go against the years of debt reduction talk. So let me make it clear, “Don’t add to our children’s debt burden! Don’t!”

As Lt. Columbo would often say, “Oh, oh, one more thing before I forget.”

Taxing stock options and RTUs at the time of vesting will be a start-up and innovation killer. It’s not complicated. You are taxing folks for “earnings” when those “earnings” not only have not been converted to cash, in many cases the holder CANNOT convert them to cash. This makes no sense.

Many early stage companies attract talent by offering lower cash compensation and stock options. These options align employee and company incentives. They reduce the capital required by the company, increasing the chance they will be successful. Some of these companies become very valuable and create a lot of wealth for the employees due to these options. For any one company there is a small chance the stock becomes valuable. For any one person, there is even a smaller chance that your options have value when you leave the company. Your plans to tax these options when they vest will create a tax liability for an asset that has not yet delivered any cash, and may never deliver any value. Only wealthier employees will be able to pay the liability and it’s unlikely they will be eager to do so. Younger and less well-to-do employees will not be able to participate in this company ownership program at all.

The bottom line is managers like me will greatly reduce or simply stop offering stock option programs. The harm from this tax liability will be too great for our employees. Therefore fewer talented people will go to early stage, innovative companies. I’m not the only one that feels this way. And less talent to innovative companies will hurt the US. This will hurt younger employees. This will hurt people from poorer families.

Is that what you want? Are you trying to stop companies from issuing options as compensation? Why are you doing this?

 If it ain’t broke don’t go busting it

Originally published at Dwayne Nesmith.