Senate GOP does about-face on plan to tax vested stock options

Silicon Valley is patting itself on the back after making a huge stink and helping get rid of a provision in the Senate Republicans’ tax plan that would have brought a huge change in how stock options are taxed.

Startups, venture capitalists and others on Wednesday applauded the removal of a plan to tax stock options when they vest, not when they are exercised.

“The entrepreneurial ecosystem can breathe a sigh of relief,” said Bobby Franklin, president and CEO of the National Venture Capital Association, in a statement.

The tech industry was worried the provision would’ve been devastating to how startups recruit employees. When companies are starting out, their employees typically work for lower pay and stock options, which offer the promise of being richly rewarded later when a company goes public.

If options are taxed when they vest, employees run the risk of being forced to pay taxes on options they haven’t seen any gains on yet.

The tech industry complained to the

Senate Finance Committee, led by Sen. Orrin Hatch, R-Utah. For example, tech advocacy group Engine sent a letter Tuesday, signed by more than 600 startups, founders and others.

Wednesday, Engine said, “Changes to the Senate Tax Plan go a long way to promoting startups and job creation across the country.”

The committee threw in something else: “We are also pleased to see the Senate Finance Committee take the additional step of including a major tax reform priority for NVCA that would provide a deferral for startup employees that are forced to exercise their stock options and pay the tax bill without a liquid market to sell those options,” NVCA’s Franklin said.

Venture capitalist Fred Wilson, who earlier this week had implored people to contact lawmakers to speak out against the change, also celebrated the about-face Wednesday.

“I’m thrilled and I want to thank all of you who called your elected officials and those in the Senate Finance Committee who clearly understand the importance of equity compensation to the startup model,” Wilson said on his blog, AVC.

Meanwhile, the tax reform battle is far from over, and perhaps Silicon Valley can make its voice heard on other important provisions in the Republicans’ tax plan. As John Battelle of Wired fame wrote atop his blog post Wednesday, “The Senate drops ill-conceived stock option language after Valley uproar. We should roar some more.”