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Silicon Valley is trying to stop the U.S. Senate from taxing employees’ stocks while their companies are private

Even the mere possibility of a stock tax drew a sharp rebuke from leading companies and their investors.

Senate Majority Leader Mitch McConnell 
Senate Majority Leader Mitch McConnell 
Drew Angerer / Getty

Top Silicon Valley investors and leading companies like Airbnb and Uber are beginning to mobilize against the U.S. Senate’s tax reform bill, fearing a provision that would change how employees get taxed on any shares they receive as part of their compensation.

The Senate measure, introduced last week, specifically would tax shareholders of private companies at the time that their shares are vested — so, when an employee formally acquires the stock. That means an employee could be required to pay the IRS even though they will not necessarily be able to take home any profit on those shares.

Even the mere possibility of that tax drew a sharp rebuke on Monday from Silicon Valley’s leading companies and their investors. More than 500 from the tech industry — including the likes of Sam Altman, the leader of Y Combinator; Dustin Moskovitz, the co-founder of Facebook; and Max Levchin, the co-founder of PayPal — urged the Senate in a letter to eliminate the proposal.

“We cannot overemphasize how essential stock-based compensation is to a startup’s ability to recruit and retain talent,” they wrote in a missive, organized by one of their Washington, D.C.-focused advocacy groups, called Engine. Companies like Airbnb, Lyft, Medium, Uber and Vimeo also signed the note.

“Startups do not have the ability to compete with larger firms based upon cash compensation,” the tech titans continued. “A startup’s ability to issue stock options levels the playing field by giving potential employees something unique: the ability to share in the company’s rewards as well as its risks and participate in the upside of a new and exciting venture.”

Most startups offer stock compensation in addition to salary, doling it out typically over a four-year period. But stock in a private company is hard to sell on an open market. Currently, employees who receive stock in a private company as an RSU or an option, only pay taxes when they’re exercised such as in a secondary sale or an IPO.

The Senate bill would change that, and arguably, it means the U.S. Treasury would see lower tax revenue. It also could dampen startup ambitions — if they have a harder time offering a potential lottery win to talent, it may make it harder to attract talent.

Despite Silicon Valley’s early, fierce opposition, however, the idea is still in its infancy. There are still many difficult steps before the proposal — and a wholesale overhaul of the U.S. tax code — becomes law.

Meanwhile, a version of tax reform in the House would ask shareholders to only pay taxes when their shares are exercised through an IPO, an acquisition or some other liquidity event that turns their on-paper cash into real, green cash.

“The House bill right now is good. The Senate bill right now is terrible,” said Scott Spector, a lawyer at Fenwick & West. “The Valley is getting energized, but as you know it’s all about reconciliation.”

If both chambers pass tax bills — which is no certainty — the legislation would be melded together in a so-called conference committee, where the Senate and House proposals would have to face off. There, it’s possible that the tech industry’s fierce lobbying pays off, and it’s eliminated.

That’s why many of the region’s leading voices are mobilizing this week.

“If this [Senate] provision becomes law, startup and growth tech companies will not be able to offer equity compensation to their employees,” predicted venture capitalist Fred Wilson on his well-read blog on Monday. “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.”

Bob Reisenweber, the head of the mobile ad startup 4045 Media, said that the Senate bill “baffles me.”

But he acknowledged that the House proposal “is long overdue and takes a heavy burden off of the shoulders of startup employees, who would like to exercise their options in order to share in the upside of their company, but lack the personal liquidity to do so.”

The National Venture Capital Association, the investor industry’s main lobby group, is pushing the Senate to include the stock options provision that it successfully pushed the House to adopt.

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