Tax Reform Provision Is Concerning for Startups

Tax reform is finally here. While the House and Senate undergo amendments, markups, and debate, the tech community is engaging to stop a provision that changes the way stock options are taxed. Those who should be most concerned? Startups. 

THE DETAILS: The provision in the Senate's bill would tax stock options as they vest rather than when they're exercised, as stated in the current tax code. Stock options may be worth a lot on paper, but not until the startup goes public or is acquired and employees can cash in. 

THE IMPACT: The proposed changes mean employees would pay regular income tax on income they've not yet received, and may never see, and can't invest or save. Stock options are a huge draw for startups in recruiting quality talent and give them leverage when competing with larger companies.

WHAT'S NEXT: The House tax bill had a similar provision last week that was dropped by Ways and Means Committee Chairman Kevin Brady, and Senator Rob Portman introduced an amendment to strike the provision in the Senate bill. The Alliance will continue to monitor and engage on this provision and we encourage our members to do the same.

UPDATE: Thank you to all Alliance members who weighed in on the stock options provision in the Senate's tax reform legislation. We're pleased to announce the provision has been dropped and the industry's quick, resounding response is to thank. We'll continue to monitor tax reform as the Senate and House markup their respective bills. 

You can read the industry letter many of our members signed here

member perspective

"At Aspire Ventures, we consider equity a significant part of our employees' compensation package. Taxing the theoretical value of a venture which as we know has a very slim chance of being realized - given the probability a venture will fully mature - is a huge burden on the individuals and the fledgling companies trying to grow. This provision will make it difficult to recruit and retain the smart people we need to solve big problems in innovative ways and to scale the companies we are trying to create. It reduces the risk tolerance of individuals and companies to invest in innovation. I believe the measure would stifle innovation through taxation." - Alison Lowery, Chief Operating Officer

"Enplug is one of the early members of the burgeoning "Silicon Beach" tech community in Southern California.  Like many start-ups, we had to be extremely scrappy. Committing to an early stage start-up is already a challenge in the current climate. Putting additional burden and risk on entrepreneurs and early employees will only serve to make lives harder and dissuade innovators & job creators. Enplug is proud to be a founding contributor to the Los Angeles tech scene. We hope to see it grow into a worldwide hub like Silicon Valley, accelerating a vibrant local economy. *Positive* tax reform that spurs pioneers is what will help make this happen." - Navdeep Reddy, CIO 

"This heavily impacts a start-up's ability to recruit in a cash poor position." - Ayinde Alakoye, Co-Founder, nēdl