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Silicon Valley criticizes GOP proposal to tax employees' stocks

Some executives in the startup industry, however, have pushed for companies to move toward bigger salaries so employees are not so dependent on options to buy a house or pay for other large expenses.

Start-ups are anxious about one part of the Senate's tax reform proposal that would hurt their ability to compete: taxing stock options when they vest, instead of when they are exercised as is now done. To lure talented employees away from public companies and comfortable jobs, startup founders often have to dole out stock options.

That said, the Senate's proposal on taxing stock options may not make it into the final tax law.

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. Since vesting typically occurs many years before a stock is sold (or even can be sold because startups restrict stock sales before a company goes public), that tax bill could be crushing.

"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". "There's some larger companies, not just venture companies that are anxious about this".

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

Although the tax plan has many startups and entrepreneurs anxious about their future, others believe that there is no way that the tax plan will make it through the Senate unchanged.

"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 co-founder Dustin Moskowitz.

"We can not overemphasize how essential stock-based compensation is to a startup's ability to recruit and retain talent", they wrote.

Republican Senator Rob Portman of OH, a member of the Senate Committee on Finance, has filed an amendment to repeal the provision in the tax bill, according to his spokesman.

The tax would be a major problem for startups and other new businesses, many of which use stock options to partially pay employees that they would otherwise be unable to afford.

The idea landed like a bomb in the Silicon Valley community this week.

Silicon Valley and other US startup hubs are outraged at a provision in the newly revealed Republican tax plan that some tech leaders say could have a devastating impact on the way startups are funded.

Senate Republicans have now proposed taxing those stock options as they vest and before startup employees have the opportunity to cash them in, resulting in annual tax bills that could easily climb into the tens of thousands of dollars, say startup founders and venture capitalists.

Thiel Foundation did not respond to a request for comment on the Senate proposal. Options are exercised when the price they were granted at-known as the strike price-is lower than the share price, and some shares can then be sold to pay the taxes.



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