Wed, Nov 15, 2017 - Page 10 News List

Silicon Valley pans Senate proposal to tax start-up options


A proposal by the US Senate on Monday to change the way shares in start-ups are taxed incited panic and dread in Silicon Valley, with start-up founders and investors warning of nothing less than the demise of their industry should the proposal become law.

The provision in the US Senate’s tax reform plan, which appeared to catch the industry by surprise, involves the treatment of employee stock options. These options give the holder the right to purchase shares in the future at a set price, and can be very valuable if a company does well and the share price increases.

Options are often a major portion of the compensation for start-up employees and founders, who take lower salaries in anticipation of a big payout if their start-up takes off. Options typically vest over a four-year period.

US Senate Republicans have proposed taxing those stock options as they vest and before start-up employees have the opportunity to cash them in, resulting in annual tax bills that could easily climb into the tens of thousands of dollars, start-up founders and venture capitalists said.


“If there were a single piece of legislation to adversely affect start-ups, it would be this,” Menlo Ventures managing director Venky Ganesan said. “Everyone is freaked out.”

National Venture Capital Association vice president of government affairs Justin Field said that the US Senate’s proposed tax change would be “crippling” to the start-up industry.

How far the provision gets remains to be seen.

The National Venture Capital Association was successful in getting a similar proposal removed from the House of Representatives tax bill, although it “didn’t fully appreciate” the Senate’s intention to add the tax provision, Field said.

The association also helped to steer lawmakers away from a proposal discussed late last year to tax venture capitalists’ profits on investments at a higher rate.


Republican Senator Rob Portman, a member of the US Senate Committee on Finance, has filed an amendment to repeal the provision in the tax bill, his spokesman said.

Under the current tax code, employees are taxed only when they exercise their options. Options are exercised when the price they were granted at — the strike price — is lower than the share price, and some shares can then be sold to pay the taxes, but the US Senate proposal would require start-up employees to pay regular income tax on the value gain of their stock options even before they are exercised.

These options are illiquid assets and they cannot be spent or saved.


“What this would mean is every month, when your equity compensation vests a little bit, you will owe taxes on it even though you can’t do anything with that equity compensation,” Union Square Ventures venture capitalist Fred Wilson wrote on his blog on Monday.

“This reform will force the average employee to pay taxes on that bet well before they even know if it’s a winning ticket,” marketing data start-up 6sense founder Amanda Kahlow said.

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