Nov 7, 2017

Republican tax bill includes big break for startup employees

House Majority Leader Kevin McCarthy, who has backed changes rules for stock options. Photo: Cliff Owen / AP

House Republicans may win some new fans in Silicon Valley, with a new tax proposal that would help employees of highly valued startups that have not yet gone public.

Why it matters: If a startup employee wants to change jobs, he or she is often required to exercise vested stock options within 90 days or else lose them. But that employee also is on the hook for associated taxes, despite there not being a way to sell any of the shares. In other words, the employee has to pay real money to cover paper gains — a situation that is often untenable, particularly given that startup compensation is usually cash-light and stock-heavy.

The new rule, introduced Monday night via an amendment to the House GOP tax bill first released last week, would defer taxes on exercised stock options and restricted stock units for up to five years (so long as the company remains privately-held). If passed into law, this should help remove the "golden handcuffs" that effectively prevent many startup workers from changing jobs, or from requiring them to give up shares that they had helped to make valuable.

Some startups, like Pinterest and Quora, have remedied this situation on their own. But most haven't, and the number of those affected has grown due to a recent trend of top "unicorn" startups choosing to remain private longer than ever before.

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