New Bill Would Target Stock Options of Startup Employees
TLDR: Senate legislation introduced late last week would tax certain employee stock options upon vesting, rather than upon exercise. Although the bill is ostensibly designed to curtail the tax benefits that CEOs and other high-level executives receive, the legislation would harm the startup community by targeting the stock-based incentives that new companies use to attract top-tier talent.
What’s Happening This Week: Sens. Bernie Sanders (D-Vt.) and Chris Van Hollen (D-Md.) introduced legislation late last week that would tax nonqualified stock options of more than $100,000 at vesting for employees making at least $130,000 per year.
Under current law, employees must pay a tax on their stock options when they exercise them—that is, when they actually purchase the shares. This tax structure already creates problems for many employees at private companies, since there’s usually no liquid market that an employee can use to sell some of their newly acquired shares to help pay the tax. As such, many startup employees have to defer exercising their options until they have enough cash on hand, in some cases even putting themselves at risk of losing their options altogether. Under the new proposal from Sens. Sanders and Van Hollen, employees would have to pay a tax as soon as the shares vest, subjecting them to a tax for “income” they haven’t yet obtained, and, if their shares lose value, on income they will never see.
In a summary of the bill—known as the CEO and Worker Pension Fairness Act—Sen. Sanders said the goal of the legislation is “to limit the significant tax benefits that top executives receive through special retirement plans.” According to reports, the bill’s sponsors have indicated that the potential negative impact on startups is unintended, and there is still room to tweak the bill to address these concerns before it moves forward.
Why it Matters to Startups: In order to attract and retain the best talent, startups often offer employees stock options and other forms of equity compensation. Although the bill’s proposed tax change is designed to target the retirement plans of top executives, it would force startup employees who receive stock options as part of their benefits package to pay a tax before they actually receive any value from their equity compensation.
As Evan Engstrom—Engine’s executive director—told CNBC, we are concerned that the legislation “would put start-ups at a huge huge huge disadvantage,” relative to more established companies when competing for top talent. Larger companies are better positioned to offer prospective employees higher salaries, and taxing the stock-based incentives that many startups offer could push would-be startup employees to larger competitors.
Senate Republicans supported a similar tax change during negotiations over the Tax Cuts and Jobs Act of 2017, but the proposal received strong pushback from entrepreneurs and startups across the country. Engine led a letter signed by more than 600 startups, investors, and innovators that urged the bill’s supporters to consider the impact the change would have on the U.S. startup ecosystem, saying that the proposal would put startups “at an insurmountable disadvantage.” Lawmakers ultimately did not include the proposal as part of the eventual tax overhaul.
Instead of simply targeting highly paid executives at the largest firms, the new legislation could harm startup competition by undermining one of the prime perks new companies can offer to prospective employees. Startups overwhelmingly opposed this proposal during the 2017 tax overhaul discussions, and we urge lawmakers to once again recognize the negative impact this legislation would have on the U.S. startup ecosystem.
On the Horizon.
The House Energy and Commerce subcommittee on consumer protection and commerce is holding a hearing this morning at 10 a.m. to discuss “fake and unsafe products on online marketplaces.”
The House Financial Services Committee is also holding a hearing this morning at 10 a.m. to examine “how bad actors exploit financial systems,” a panel that is likely to discuss some lawmakers’ concerns about the various uses of digital currencies.
The House Small Business Committee is planning to hold a hearing at 11:30 a.m. today to discuss “the benefits of blockchain technology for small businesses.”
The Senate Judiciary subcommittee on crime and terrorism is holding a hearing at 2 p.m. this afternoon on “Dangerous Partners: Big Tech and Beijing.”
