Tech-based startups, and others, give stock options as the means to attract and retain their top talents. This was one the best, if not the best, options young, cash-strapped companies leveraged. It would bridge the gap between paying at market-value or standards and below-market compensations.
However, all that came under threat earlier this year when the Senate Tax Reform Bill was drafted. The draft proposed that these stock options (also, employee stock options or ESOPs) be taxed when they vest as opposed to when they are ‘exercised’. This would have drastically impacted the way stock options are treated.
The law stated that employees were only taxed when they exercised (or sell) their shares, which usually happens when a startup is acquired or decides to go public. The proposed bill sought that employees pay taxes on when their stocks are vested – when they have the option to exercise it.
While the stock options do have a value associated when vested, they are not liquid and mean very little. The startup employees would have paid taxes that would amount to thousands, if not tens of thousands, of dollars.
Industry trade group, National Venture Capital Association, lobbied against it along with Silicon Valley’s venture capitalists and entrepreneurs, who predicted the demise of the startup industry if the tax were to be passed by law.
Investors and executives from companies like Uber, Airbnb and Stripe were among the 600 plus companies that signed a letter to Orrin Hatch, the Senate Finance Committee Chairman, appealing against the provision.
The federal has now dropped these measures from its plan. In addition to this, the National Venture Capital Association (NVCA) also succeeded in getting another, similar proposal removed from the original House tax reform bill.
According to a report by Reuters, the revised version of the Senate bill includes provisions for startup employees to “defer for five years their stock options tax bill if they reach the deadline to exercise them but the company is still private and shares do not trade on the public markets.”
Bobby Franklin, president and chief executive of the trade association said, “The entrepreneurial ecosystem can breathe a sigh of relief.” They are now hailing that the changes are in line with job creation and economic growth.