Silicon Valley fumes over tax reform proposal

Under the Tax Cuts and Jobs Act, stock options would be taxed when workers earn the right to exercise them

Startup founders and venture capitalists are up in arms over a provision in the new Senate tax reform proposal which seeks to dramatically change the way stock options are taxed.

In the Senate Republicans’ proposed Tax Cuts and Jobs Act, stock options given to company employees will be taxed when they vest, meaning when the employees earn the right to exercise the options.

Profits on the stocks can’t be pocketed by employees until they fully exercise the options after a vesting period. The current law taxes only when the employees actually exercise their options.

In the high-growth, high-risk world of venture capital and startups, this change is monumental, as vested stock options can quickly turn worthless before they are exercised by employees. The proposed tax change would discourage prospective employees — many of whom work for a low salary, hoping for a big stock option payout — from joining cashstrapped and high-risk startups, say opponents of the reform measure.

“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,” venture capitalist Fred Wilson wrote in a blog post. “You can’t spend it,

you can’t save it, you can’t invest it. Because you don’t have it yet.”

Others in Silicon Valley tweeted about their frustrations:

“Universally terribly absolutely positively bad,” tweeted JR Sims, a director of a global startup community called Startup Grind.

Organizations representing some of Silicon Valley’s largest companies have already mobilized to try to convince Senate Republicans to drop the provision.

The National Venture Capital Association said in a tweet that it is “working hard” to remove the provision from the proposal.

The tech-backed advocacy group Engine wrote a letter to Senate Finance Committee Chairman Orrin Hatch, R-Utah, on Monday to reconsider the provision.

“This shift would have profound negative consequences for technology start-ups,” Engine wrote in the letter, which was co-signed by companies like Airbnb, Uber, Lyft and luminaries such as Y Combinator President Sam Altman and Facebook cofounder Dustin Moskowitz. “We cannot overemphasize how essential stock-based compensation is to a startup’s ability to recruit and retain talent.”

The Senate’s tax reform provision was introduced last week in response to the original draft from the

House of Representatives. The House bill allows employees to defer taxes on their exercised stock options until there is a liquid market to sell them, a proposal warmly welcomed in Silicon Valley.

But the backlash against the provision is not universal in Silicon Valley. While not in agreement with the Senate proposal, some wanted a more balanced approach to how Silicon Valley provides both cash and stock option compensation to its employees.

“The use of stock options is a little excessive and we’ve been in favor of a bit more cash compensation,” said Renaissance Capital’s founder and principal Kathleen Smith.

Amid the outrage on social media, individuals brainstormed about how to pressure the Senate to eliminate the tax proposal. A couple of startup founders reached out to Peter Thiel, the Facebook board member and President Donald Trump’s tech adviser, to stop the plan.

Thiel Foundation did not respond to a request for comment on the Senate proposal.

Others discussed calling their senators on both sides of the aisle.

“The best way to do that is to call their office and speak to the staffer who handles tax reform for them,” wrote Wilson. “This is really very important to everyone who works in tech.”