sadly, I don’t think this is really about what makes sense. It is about politics. The US Senate, particularly the Republican leadership, needs to hear from you, the employees who will feel the pain of this change, that it is wrong. Otherwise, I think this provision could become law. And that would be the end of equity compensation in startups as we know it. If this provision becomes law, startup and growth tech companies will not be able to offer equity compensation to their employees. We will see equity compensation replaced with cash compensation and the ability to share in the wealth creation at your employer will be taken away. This has profound implications for those who work in tech companies and equally profound implications for the competitiveness of the US tech sector. So, what can we do about this? First, we have to move fast. The tax reform bill is moving quickly with a goal of getting it done before year end. This particular provision, which was in the House bill and was taken out last week, will be considered by the Senate as soon as TODAY. So, please reach out to your Senators and let them know that they “must remove Section III(H)(1) from the Senate Tax Cuts And Jobs Act”. The best way to do that is to call their office and speak to the staffer who handles tax reform for them. Here’s a short explanation of how to do that. Please do it today. This is really very important to everyone who works in tech.
The current draft of the Senate Tax Reform Bill would tax stock options and RSUs upon vesting. Currently, stock options are taxed upon exercise and RSUs are taxed upon release of the underlying shares. This is a HUGE deal to everyone who works in companies that partially compensate their employees with these two equity instruments. 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. You can’t spend it, you can’t save it, you can’t invest it. Because you don’t have it yet. Taxing equity compensation upon vesting makes no sense. I have seen many employees leave companies and not exercise their vested stock options. It happens all of the time. That should be a clear enough example to the lawmakers that vesting should not be a taxable event.