Senate Tax Plan--RSU action

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All,The tax reform plan under consideration in the U.S. Senate includes a provision that would tax employees on stock options or restricted stock units (RSUs) at the time of vesting, regardless of whether or not there had been a liquidity event. Were this to go into effect, employees could potentially owe taxes on assets they can’t access to pay those taxes.

Not only could this provision have a harmful impact on private company employees who have options or RSUs that are vesting at regular intervals, but it would also have a chilling effect on future startups’ ability to offer equity in lieu of cash compensation to attract top talent.

Our friends at Engine have put together the

attached letter

(language also pasted below) to be delivered to Sen. Orrin Hatch, Chair of the Senate Finance Committee, by COB Monday.

Please email Evan Engstrom ([email protected]) if you’d like to sign on by

12pm

EST tomorrow (11/13) and include your name, title, and company affiliation.

There is still a chance that this provision will get pulled from the bill on Monday (which is what already happened in the House), but it’s important that the letter is ready to go if not.

A little more background can be found 

here

 and

here

.

Thanks,

Tech:NYC

--

Dear Chairman Hatch:

We are a group of startups, investors, and innovators deeply concerned about the proposed changes to the taxation of non-qualified deferred compensation plans in Section III(H)(1) of the Tax Cuts and Jobs Act. This shift would have profound negative consequences for technology start-ups by, among other things, undermining their ability to compete with large incumbents for employees.Section III(H)(1) would require both tax assessment and payment on stock options and other stock-based incentive compensation upon vesting instead of exercise, distribution, or any other liquidity event. The current law, embodied in Section 409A of the Tax Code, enshrines the common-sense notion that employees should pay taxes on income that they actually receive. By making the mere vesting of a stock option a taxable event, an employee would have to pay a tax based upon a hypothetical gain that could take years to become liquid and may never materialize into cash. This would transform stock-based incentive programs from benefits to liabilities overnight and would effectively bar startups from offering this form of compensation.We cannot overemphasize how essential stock-based compensation is to a startup’s ability to recruit and retain talent. Startups do not have the ability to compete with larger firms based upon cash compensation. 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. This is not just limited to the startup’s top managers: according to one study, nearly 75 percent of venture-backed startups provide options to all employees. In addition, startups are themselves commonly founded by 3 people using the proceeds of stock options that they received at previous startups. Stock-based compensation fuels the growth of existing startups and spurs the creation of new companies.The changes proposed by Section III(H)(1) would take stock options off the table for startups, which lack the resources to establish and maintain qualified plans or provide employees with increased cash compensation. This will put startups—which are responsible for all net new job growth— at an insurmountable disadvantage. This will reduce competition, innovation, and job opportunities. Section III(H)(1) therefore undermines the stated purpose of tax reform by reducing job creation.The House of Representatives wisely chose to eliminate this proposal from the House bill.We respectfully request that you remove from Section III(H)(1) from the Senate bill and otherwise decline to change the rules concerning the taxability of non-qualified deferred compensation plans. As written, Section III(H)(1) would cripple startups’ ability to recruit the talent needed to innovate.Sincerely,[Undersigned]