Silicon Valley is in dread and panic as the U.S. Senate proposes new ways to tax shares in startups on November 13. Many startup founders and investors have warned that the industry will vanish if proposal becomes the law.
The tax reform plans of the U.S. Senate caught Silicon Valley off guard with inclusion of treatment of employee stock options. It provides rights to a holder to buy shares in future at a set price. These shares will become so valuable if company performs good and share prices increase.
Options are significant for gaining compensation for startup founders and employees as they choose to opt for less salaries for bigger payout if their startup performs well. There is a four-year period to vest those options.
The U.S. Senate proposed a reform that involves taxing those options as they vest or before they cash in. This reform would result in tax bills of tens of thousands of dollars. According to current law, options are taxed only when holders exercise them.
“If there were a single piece of legislation to adversely affect startups, it would be this,” said Venky Ganesan, Managing Director at Menlo Ventures. “Everyone is freaked out.”
Justin Field of the National Venture Capital Association outlined that the proposed tax reform would be “crippling” for the startups.
Few executives in the startup industry have recommended companies to pay big salaries to employees and top executives of companies. This would prevent them from depending on options.
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. The amendments would restrict startups from attracting talent.