Silicon Valley Hits Out At Senate Proposal, Calls It 'Crippling' For Startups

Remigio Civitarese
Novembre 15, 2017

A proposal by the U.S. Senate to change the way shares in startup companies are taxed incited panic and dread in Silicon Valley, with startup founders and investors warning of nothing less than the demise of their industry should the proposal become law.

Under the new plan, the Senate would place a tax on stock options at the time when they are vested rather than when the shares themselves are exercised.

These options give the holder the right to purchase shares in the future at a set price and can be very valuable if a company does well and the share price increases.

Venture capitalist Fred Wilson said the stock option change "has profound implications for those who work in tech companies and equally profound implications for the competitiveness of the USA tech sector". "Everyone is freaked out". The National Venture Capital Association said in a statement the draft legislation "would cause great harm to the ecosystem", urging that legislators "not raise taxes on investment in entrepreneurial activity".

How far the provision gets remains to be seen.

The tech-backed advocacy group Engine wrote a letter to Senate Finance Committee Chairman Orrin Hatch, R-Utah, on Monday to reconsider the provision.

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. Stock options are now taxed when they're exercised, or sold at a set price. 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.

Early employees or founders would have to pay taxes even if they don't sell their stock. These options are illiquid assets, and can not be spent or saved. "You can't spend it, you can't save it, you can't invest it". He called on startup employees and other people paid with stock options to contact the Senate about their concerns.

When that employee owns hundreds of thousands and even millions of shares, that is a hefty bill to pay.

Bob Reisenweber, the head of the mobile ad startup 4045 Media, said that the Senate bill "baffles me". It would be impossible.

Joining an early-stage startup is risky: toiling for long hours at below market rates for a company that has a minuscule chance of hitting it big. And when startups suffer valuation cuts, employees can end up with worthless options. While not in agreement with the Senate proposal, some wanted a more balanced approach to how Silicon Valley provides both cash and stock option compensation to its employees. A spokeswoman for the Senate Finance Committee did not immediately return a CNBC request for comment.

The spokesperson of Senator Ron Wyden, the ranking member of the committee and a Democrat, said that Senator knew that there would be issues about the amendment.

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