Nov 13, 2017 - Economy

Senate GOP tax plan causing heartburn for startups

From left, Senate Majority Leader Mitch McConnell, Senate Finance chairman Orrin Hatch, Treasury secretary Steven Mnuchin, and Trump's economic adviser Gary Cohn, make statements to reporters. Photo: J. Scott Applewhite / AP

The Senate GOP tax plan unveiled last week includes a provision that would tax stock options and restricted stock units at vesting, rather than when they are exercised (as under current law) or when there actually is a liquid market (as under the amended House proposal).

Why it matters, per Greg Grogan, a compensation and employee benefits attorney with Simpson Thacher & Bartlett: "Employees will owe taxes on 'potential' value on the vesting date of their options before they know whether the option will ever really be worth anything and before there is any cash available to pay taxes."

  • Not only is such a plan nonsensical in terms of encouraging new company creation, but it's also fiscally dumb.
  • For example, imagine if all early Facebook employees had been taxed at the time of vesting (at relatively low valuations) as opposed to the time of exercise or sale. Pretty sure that would result in lower tax revenue (while, again, the entire plan might have discouraged people from working to build Facebook in the first place).
  • If it passes: Startups would need to flip their compensation structure to favoring cash over equity.
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