This Single Tax Change Could Destroy the Startup Ecosystem as We Know It

This Single Tax Change Could Destroy the Startup Ecosystem as We Know It(inc.com)

8 points by danaseverson 8 years ago | 3 comments

mankash666 8 years ago |

The current administration is not pro small business, for all their shilling about being business friendly. If the current tax bill passes as is, it'll trigger a housing crisis (mortgage deductions capped at $500K), probably increase tax for residents of states with state income taxes, and kill startups with this options thing.

It'll only benefit Trump & his big business cronies.

adventured 8 years ago | |

It's not going to trigger a housing crisis what-so-ever.

~97.5% of all home owners will remain unaffected by that cap at $500,000.

"approximately 2.5 percent of Americans are paying mortgages on homes valued at $500,000 or more."

https://www.washingtonpost.com/news/wonk/wp/2017/11/03/how-m...

88% of the benefit of the state income tax subsidization goes to people making over six figures.

"The state and local tax deduction disproportionately benefits high-income taxpayers, with more than 88 percent of the benefit flowing to those with incomes in excess of $100,000."

https://taxfoundation.org/press-release/benefits-state-local...

You're taking issue with taxes going up on people that are doing quite well, in other words.

Further, the stock options taxation policy has been removed from the Senate legislation and has zero chance of becoming law.

The 20% corporate income tax rate will benefit the majority of small businesses.

zekevermillion 8 years ago |

According to AVC this language was changed in the final version of the bill, and the bill is now favorable to the interests of VC-backed startups.

Nevertheless, taxing options when they vest rather than when exercised (NSO) or on sale of underlying stock (ISO) might not be such a big deal. If this change had been adopted as law, the option-holder could presumably still make an 83(b) election when the option is granted. But if not, then yes, this would be the end of option comp as we know it.

But the existing tax code is problematic enough. Ideally we could give startup employees restricted stock grants through all stages (or at least, the early stages) of growth. Instead, b/c of the deemed fair market value of the stock, we have to use options to avoid a phantom tax hit. Option comp leads to a lot of the stories we hear from aggrieved employees and former employees of high-flying startups, whose interests often get lost in the shuffle.

What if we could change the code to permit taxing startup restricted stock grants on exit instead of on grant. Define startup restricted stock grant as illiquid private company stock issued as equity compensation to service providers. Here's a compromise -- allow an elective deferral of tax until exit, with the trade-off that stock taxed on exit pursuant to the deferral is taxed as ordinary income. This would solve so many problems, and vastly simplify early-stage equity comp. Alas, our tax code is held hostage to the cat-and-mouse game played with large public companies and PE funds, and efforts to make those people pay more tax end up having tremendous unintended fallout on small private companies.