Senate’s Tax Plan Will Kill Stock Options And Cripple Utah’s Startups
Should this provision be put into law, it would destroy the ability of startups to compete.
Last week, the US Senate released its Senate Tax Reform Bill, which the President and GOP have touted as a bill intended to cut taxes and simplify the tax code. Surprisingly, there is a piece of the tax code that will crush startups. The bill is proposing that stock options and RSU’s (Restricted Stock Units) be taxed upon vesting and not upon liquidity.
This proposal is nothing short of catastrophic for startups. Many startups compensate employees with stock options, allowing employees to participate in the upside of the business if/when the business succeeds. Those options typically vest over four years, meaning that every month a small percentage of their stock options are unlocked. Those stock options are held until the company is sold or goes public. Until then, there is rarely an opportunity for employees to get liquidity from their options. Under this new bill, every month that an employee vests his/her equity, they would be creating a taxable event and would be taxed on the value of those options.
Stock option vesting should not be a taxable event. Until there is a liquidity event, those options are nothing but a number on a piece of paper. There’s no way to spend, invest, or transact with your stock options. In fact, until you actually exercise your options (purchase them at the discounted price from your company), you don’t even own the stock. Why then should employees be taxed on them?
Should this provision be put into law, it would destroy the ability of startups to compete. Startups would have to increase cash and bonus compensation, which they frankly don’t have. It would also be damaging to early employees, as they would lose out on the ability to own part of the startup they’re helping build. Early startup employees often go on to start their own companies with the money and skills they gained while working for previous startups. PayPal’s early employees have gone on to found companies like LinkedIn, Tesla, Yelp, YouTube, Square, SpaceX, Kiva, Yammer, and 500 Startups. This bill would very likely have the unintended consequence of negatively impacting innovation.
Politicians constantly refer to entrepreneurs as the “backbone of the economy,” with nearly 2/3 of all jobs created in the last decade coming from small businesses. Ironically, the Senate’s new tax bill is unfriendly to entrepreneurs, will kill innovation, and hamper the ability of startups to compete for talent.
Please contact your Senator today. Ask to speak to the staffer who handles tax reform and let them know they must “remove Section III(H)(1) from the Senate Tax Cuts And Jobs Act”.
Senator Hatch: (202) 224–5251
Senator Lee: (202) 224–5444
Davis Smith is the founder and CEO of Cotopaxi, a member of the United Nations ‘Global Entrepreneurs Council’, and Silicon Valley Community Foundation’s ‘CEO of the Year’ in 2016.
