Don't Tax Options And RSUs Upon Vesting!

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.

But, 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.


Comments (Archived):

  1. Gal

    I guess if you remove AMT you need to get the money from somewhere

    1. pointsnfigures

      Removing AMT is a good idea. Taxing options before they are actually exercised is a bad one.

  2. awaldstein

    I will.This is a nightmare for innovation and honestly would have greatly and negatively impacted my life.

  3. Jason T

    I believe all references to stock options and equity awards were removed of Friday by Republican Ways and Means amendments. And the Senate version that came out Friday afternoon had no implications for equity awards. So you’re off the hook.

    1. fredwilson

      Wrong. It came out in the House late last week. Still very much in the Senate bill

      1. Jason T

        Here is a link to the GOP Senate proposal that came out on Friday.….It will be debated and amended starting today. But I do not believe it contains and references to equity awards, RSUs, or deferred comp.

        1. pointsnfigures

          I recall back in the day there used to be transaction taxes proposed every year in House, Senate and Presidential budgets. It was a software bug that autopopulated yet we had to fight it every year. Fred is correct that you need to reach out to your Senator (and Congressperson) and simply make them aware. Perhaps we should draft a simple form letter so they have something to lean on. If there are Republican legislators with startup communities, you might ping them as well. The ranking members from each party on the tax writing committees need to know as well.

  4. Toby Eggleston

    Australia adopted a similar approach in 2009 and it was a disaster for startups. It was fixed in 2015 thanks in large part to a public campaign from the founders of Atlassian who were frustrated with the difficulties in offering options to Australian employees vs the US. Since the law change the number of companies offering equity has exploded. I can’t fathom why the US would go down this path.

    1. mattbond

      Australia was taxing people on the granting of options, not vesting. It is definitely restrictive to start out but in the case of Atlassian in Australia, I was never taxed on the spread when I exercised which was lucrative. When I moved to the US I was taxed on the spread when I exercised (which was a lot) so in this particular case, Australian law was better financially.

      1. Toby Eggleston

        Matt, you could elect to be taxed upfront pre 2009 but that was changed to automatic deferral until vesting. The 2015 changes are a huge improvement from where we were. Cheers Toby

  5. Alexbhardy

    Everything I’d read about the House version of the bill said that it would be a boon for startup employees (tax delayed until liquidity). I haven’t seen any coverage of Senate version.1) Don’t the Senate (bad version) & House (better version) versions have to be reconciled? So the startup-unfriendly part might not become law?2) Are there any CPAs who could weigh in here and confirm it’s this dire?

    1. fredwilson

      The House Bill had this same provision until late last week. It was taken out at the last minute but if the Senate keeps it I fear it will come back in reconciliation

      1. Alexbhardy

        Thanks Fred, appreciate the insight!

  6. jason wright

    this seems quite unnatural, and in the ‘bonkers’ category of political did it ever gain momentum?

  7. JimHirshfield

    This is absurd. Will they tax inclinations, propensities, and possibilities next?

  8. pointsnfigures

    There are good things in the tax bill, and there are some warts. This is one of the warts. Governments generally don’t write laws for the little guys-they write them for the big guys. Most people that work for big corps don’t walk away from vested compensation packages but as Fred says it happens in startups all the time.I think it’s less about politics and more about finding ways to generate revenue so the bill is “revenue neutral”. Being revenue neutral is a bad construct to begin with because it leads to an accounting mindset when looking at tax policy rather than a dynamic mindset.I am a big fan of cutting corporate and individual rates, companies being able to expense sooner and not being able to write off state and local taxes.

    1. Jon Smirl

      Not being able to deduct property taxes could cause a lot of damage in my area which has very high property taxes. There are numerous elderly in this area. Removal of the property tax deduction may increase their total tax bills up to $10,000 without them having any flexibility in paying it. Most houses for miles around me are paying over $20,000/yr, a few are paying $100,000/yr.

      1. Pointsandfigures

        In my area (IL) we have some of the highest property taxes in the country. Economically, why should a citizen of a low property tax state subsidize a citizen in a high property tax state? Essentially that’s what the tax code currently does. Having local people feel the full brunt of taxes will change the way they look at and elect local governments.

        1. Jon Smirl

          Housing is not liquid. When the law changes a double whammy is going to happen. Your tax bill is going up, and property values are going to fall. This will make it hard to sell your home and leave. Some of these elderly people will get trapped in bankruptcy.This really should have been phased in over multiple years to give the market time to adjust. Instead it will create the equivalent to an oil shock in these high tax areas.Another angle is that these high taxes are paying off bonds. If this damages property values too much those bonds may default.

          1. Pointsandfigures

            Mostly the high taxes are going to fund big huge governments. For example in my home state of IL, 99 cents on every new tax dollar goes to pay for public pensions, not bonds. It’s been that way for the last five years or so.Phasing in would be a compromise that would allow the market to adjust-but the market would probably adjust faster anyway since everyone would know what is coming and they could factor it in the price.To me it looks like there are a lot of subsidies in housing that are artificially propping up the price. Better to let a freer market decide the price. If a macroeconomist looked at the total market, losses in high tax states on houses might be made up by the gain in prices in low tax states but that is certainly subject to a lot of assumptions. Agree that housing is not a liquid market.

          2. Jon Smirl

            Pensions are a problem in my area too. 55% of our property tax payments are going for local pensions, many of which are over $100,000/yr. The richest group of retirees in the state are the public sector retirees. This has caused a lot of tension between groups since retirees earning much less are paying property taxes to fund these excessive pensions.The future of these pensions is going to be really ugly. Clearly too much has been given, but the fight to change it is going to be a gigantic mess. Everything is going to explode in about fifteen years when Social Security and Medicare collapse.Edit: I am paying more into other people’s pensions than I am paying into my own pension. That’s just messed up.

          3. LE

            Based on your other comment about property taxes if I had to guess you are located in NJ.

          4. SubstrateUndertow

            Isn’t the real problem here the fact that your elected con-gress members are acting like process illiterate self-serving childish ideologues.No one is his right mind could possibly think/defend rewriting a more effective/fair American tax law in such a hurry.That is the definition of professional negligence/incompetence or worse!

          5. Richard

            What’s wrong with falling home prices? We as a country spend too large a pecentage of income on housing. In the long run, lower home prices will lead to further growth of the economy.the status quo isn’t working.

        2. Mark Davies

          The problem is that you find that the areas that have high local/state taxes also get less help from the federal government. I think NY, CA, NJ etc. would be fine losing this benefit if they didn’t have to fund all those states that don’t collect any local taxes because they rely on federal handouts, i.e. the majority of the red states. Then they could drop their local taxes.

          1. Pointsandfigures

            Uh-uh. Public pensions are a massive problem and so is the size and scope of government along with the many layers of government. In Illinois if you are a resident of Chicago you have various government entities that are around 300B-400B in the hole on public pensions. Only way out is bankruptcy. See or to find out more.

  9. Jon Smirl

    Doesn’t the income convert into a loss if you leave without exercising? The act of leaving is like getting assigned an option with negative value.On the other hand this is similar to a Roth IRA. You pay the tax before putting the money in with no guarantee anything is coming out at the end.

    1. Brook Shepard

      I just can’t imagine the headache of HR explaining to a 23 year old “here’s why you have to pay taxes on this now” and the 23 year old not getting like, super riled-up.

  10. Brook Shepard

    Hmm.I’ve had more than one employee say Thanks for the “equity” but I want stock, not options.” To which I’ve replied some variation of “no you don’t, because then you’d have to pay taxes, and you don’t want that.”Completely over everyone’s head.

  11. curtissumpter

    This post is somewhat hilarious considering that this tax bill by and large goes after tech workers.It taxes upper middle class people in order to pay for corporate and pass-through entity tax cuts.Where’s the post about that?

  12. Tom Labus

    I’m surprised we have this much info on this “tax bill”. Deficit and economy will take a serious hit from this GOP action. Jack Ma has a better understanding of the US economy then most of these guys. An act of outright donor politics.

    1. Pointsandfigures

      Meh, if you look at it via accounting eyes. If you look at it via growth it won’t be as bad. Problem is they need to spend on expensive stuff like military, and entitlements are nearing 67% of total budget.

  13. andyswan

    The entire notion of taxing income is absurd to begin with. Ask me about my FAIR SHARE tax plan. #Swan2024

    1. JaredMermey

      Andy, can you share your FAIR SHARE tax plan?

      1. andyswan

        (Federal Spending) / (# of citizens 18-70yo) = FAIR SHARE tax per citizen 18-70yo

        1. JaredMermey

          Everyone pays the same amount or is their FAIR SHARE just some sort of EV and a multiplier is applied for what different people pay?

          1. andyswan

            It’s a fair share. Everyone pays exactly the same amount

          2. JaredMermey

            And is that the only tax? I.e., get rid of corporate taxes, estate taxes, payroll taxes, etc?

          3. andyswan

            Correct. No more taxing of wealth or wealth creation.

          4. JaredMermey

            Not sure if I pulled right numbers from a quick google but for 2016:$3.8T in spending / 220M = $17k per person.I imagine your point would be spending would come down if everyone felt more “responsible” for it. Still, $15k+ tax commitment per person feels pretty DOA.

          5. andyswan

            I’ve heard “fair share” for 9 years straight. I think it’d be nice for people that aren’t putting $17k into the pot to STFU about how much more others should pay.Plus it would be AMAZING at reducing spending…skin in the game!!!

          6. JaredMermey

            There are some fairly broad assumptions in that. One being that people should optimize what they choose to do with their lives in order to earn enough to pay $17k (slightly different than optimize for earnings).It would be more difficult for people to choose to go into professions that pay less well but do social good (i.e., public service, teaching, social work, etc).My guess is your goal is to have less freeloading, though I don’t think the people above are freeloading and not sure they’d survive in your paradigm.

          7. andyswan

            I believe it would put significant pressure on low-pay employers to raise wages. I would assume most jobs would advertise salary as “tax + $x/yr”. If you aren’t on pace to make the payment by August, pick up a shovel and earn your tax $15/hr at a time.

          8. JaredMermey

            …and if you don’t make your tax then what? Jail?

          9. andyswan

            Pick up a shovel and earn it.Failure to do so should be treated in the same way we treat failure to pay taxes today.

          10. Richard

            while you are playing in the land bizarre, no freebies for parents/kids either. Make those 3 kids families pay!

          11. andyswan

            Taking 1/3 of what I earn and then bitching about “fair share” seems pretty bizarre to me.

          12. Richard

            taxes pay for services. for a fair share to be completely fair it would have to account for just how much of federal, state and local resources you use. Chances are you are a heavier user of air travel, road, bridges, tunnels, agriculture, commerce, the courts etc. than the a lower income person.

          13. andyswan

            I notice you found a way to leave off welfare and other benefit programs when describing the services people use. As for the court usage— have you ever BEEN to the local court?Bottom line: We should all be paying a fair share for things that we each have a fair opportunity to utilize. If you want to go to a “pay for usage” system that’s damn fine with me!

          14. Richard

            At the end of the day, we are spending 1/2 a trillion dollars more a year than what we are taking in. Everyone seems carefree when it comes to spending other people’s money. 50 % of the births in the country are paid for by Medicaid. 50% of long term care is paid for by Medicaid. We subsidize housing ownership to the point that it now consumes 40% of income. We need new approaches.

          15. andyswan

            Start billing everyone directly. Habits change when you write checks.

          16. Richard

            Agree, but it is strange that Fred is screaming about the end of tech without more help with avoiding income taxes. From the carry trade to stock options, its 20% and and not a nickel more.

          17. kidmercury

            i’ll one up you in bizarro world and demand a pet tax. i don’t have energy consuming and waste producing pets, so FU dog owners! pony up!!! 🙂

          18. sigmaalgebra

            The US has ballpark 94 million people able to work but out of the labor force. There are nowhere nearly the needed 94 million shovels or “shovel ready” jobs.As computing continues, e.g., Google putting research librarians out of work, Amazon putting lots of brick and mortar businesses out of business, tires that last 100,000 miles putting tire companies and sellers out of business, computer controlled farm tractors putting a lot of farmers out of business, the Internet putting a lot of media out of business, astounding microprocessors in cheap computers putting DEC, DG, Prime, SUN, several others, and much of IBM out of business, etc., we are awash in people absolutely, positively unemployable at anything.Now can buy a gorgeous little thingy, really cute, for about $70, with 2 TB of space. It used to be that Control Data sold a box, 750 pounds, $40,000, 300 MB; don’t see a lot of those being sold now? Right? Don’t hear much from Control Data, either.The Motorola 6800 and 68000 were the keys to Sun and more. Don’t hear much about that 68000 line or Motorola anymore.Carburetors and ignition breaker points for cars? We don’t have those anymore, and what we do have is much more reliable, thus, putting a lot of auto mechanics out of business.Your idea is basically to have each new robot kill off the humans it puts out of work.Instead, we should be arranging that having the computers, robots, etc. helps life for humans. Sooooo, tax the robots, etc.Soon, with any decent planning at all, there will be a decent basic income, with health care, etc., and people who want more can work for it.Part of my solution, for me, is to go out far enough in advanced pure math and some original, a bit tricky, applied math based on the pure math, to get some powerful, valuable secret sauce, the crucial core of being able to deliver some stuff nearly everyone on the Internet will find a “must have” with me the only source, at least for a long time at which I will have brand name, economies of scale, proprietary data, network effects, etc. as my Buffett moats. But, even if I’m fully successful, that solves the basic problem only for me and my meager needed employees. Indeed, my success will put a lot of people out of work.Easy enough to see, it takes a lot of upfront investment to create a good job. Well, we are short on the associated ideas and investment.In a profound sense, we are quite poor. One reason is the $200,000 or so per US family wasted by LBJ, Nixon, Bush 43 on absurd foreign adventures — the standard old way to ruin a country. That $200,000 kept a lot of couples from buying a house, forced the wife to work, and ran the US birth rate at 2 per woman or less, thus, having the US go rapidly on the way to extinct, literally. We need to get rid of total brain dead idiots like Bush 43, LBJ, and Nixon who ruin the US while they ruin other countries, too.Then we can get back to houses for couples, the wife pregnant and staying home caring for babies, and lots of jobs. There’s still more to be done, but between the foreign adventures and computers, etc., it’s the 94 million.There’s a LOT of productive potential there, enough to pay off the national debt and make Trump’s spending plans easy enough to pay for.When 90+% of the US workers were farmers, if they wanted more food, then they did more with the garden, chickens, cows, etc. It ain’t so simple now.

          19. sigmaalgebra

            How many million people are you willing to see die to test your moonbeam hypothesis?

          20. andyswan

            Are you telling me that millions of people are DEPENDENT FOR THEIR LIFE on the tax payments of a small number of people?

          21. sigmaalgebra

            Yup. That’s the way it is, except the payments come not just from the income taxes of “a small number of people” but also from corporations. And, in income tax, sales taxes, property taxes, the bottom 70, 50 or some such % pay only token bucks. And Trump can double the size of the zero bracket because there isn’t money enough down there to bother with.For health care, we have a lot of free health care, for nearly all the serious stuff and a lot more. No, not for everything.Some good news is how small a fraction of the average income it actually takes to eat. E.g., US agricultural productivity is astoundingly good — and getting quite a bit better quickly.Blue jeans? If buy the house brands and not the famous brands, can get clothing costs way down.Put a lot of those 94 million people back to work and there’ll be milk and honey beyond belief for nearly everyone.Then if we do a good job, we can get back to good family formation and having children again.

          22. sigmaalgebra

            Yup.Ballpark 94 million US citizens essentially all able to work but out of the labor force so not counted as unemployed. Q. From that 94 million, what can we conclude about the US job market?A. Sure, we’re very short of jobs.Lesson:Put a major fraction of the 94 million back to work, and there will be plenty of taxes to pay off the national debt, pay for all the infrastructure, central city job training, etc. Trump talked about, then lower taxes more, etc. We will get a virtuous circle of lower tax rates, more employment, more tax revenue, back to lower tax rates, etc.Q. Why? What the heck happened to the US economy?A.(1) LBJ, Nixon, and Bush 43 blew in present dollars ballpark $200,000 for each US family. That money could have bought a nice 3BR house for each of those families.(2) That spending put a lot US blood and military equipment soon converted to junk in Viet Nam, Iraq, and Akrapistan instead of houses, schools, hospitals, infrastructure, and businesses in the US.(3) Progress in agriculture, manufacturing, and computer applications destroyed a lot of jobs, and the economy has been so sick that the people who lost their jobs are not wanted.(4) Some total dirt bags bought off Congress, both parties, to import cheap goods and cheap labor, and both put a lot of US citizens out of work.Solutions:I’ll keep it short: Do what Trump has been saying. For Nasty Nancy, the San Francisco Treat, Chucky, Big Tears, Schumer, go slow Ryan-McConnell, kick them where it will wake them up or kick them out of the way.

          23. kidmercury

            even if one likes the idea, there is no way to get from here to there. ergo, reset is the only option……

          24. kidmercury

            those are also federal tax numbers. wait till you add in state and local……

          25. sigmaalgebra

            Congratulations: You have now joined the exulted list of arm chair political economists — Stalin, Mao, Pol Pot — who with such semi-bright ideas killed tens of millions of people pursuing such moonbeam nonsense.E.g., such moonbeam, moralistic stuff, had the US in the Great Depression for 12 years. With high moralistic nonsense, we refused to do the obvious things to get out of the depression. Even a cartoon with Betty Boop knew how to get out. The depression spread to US industrial trading partners and, by 1933, put in power a guy who at least got his country out that depression — he ran a “command economy”. But it turned out he was “a little funny, a little funny in the head” and went for “the old take over the world ploy” and killed 20, 50, 80 or so million people. You read about Der Führer, right?Similarly for the Japanese.But, then wonder of wonders, when the Japanese started shooting at us, we put aside that moralistic nonsense and in 90 days flat had 2-3 jobs for everyone and were OUT of the Great Depression. So, sure, when the depression was was over, we were doomed to return to the Great Depression? Nope. Only the moralistic dumb de dumb dumb, dumb political economists believed that.No, in simple terms, the market bubble burst, the margin accounts went bust, the commercial banks that had made too many of the loans went bust, and suddenly the US had no more financial system. It was like removing the oil from an engine.All we needed was more oil.What happened to the old oil, money? It suddenly ceased to exist.How? It was largely just funny money from fractional reserve banking. So, when the banks went bust, the money disappeared. No oil.Solution? Replace the oil, oops, money.How? In effect have the Federal Reserve print it.Won’t that be inflationary? Not with better banking reserve requirement regulations and no more stock market bubbles.We could have done it in November, 1929 except for the moralizing dumb political economists. We killed off a lot of them in the 1930s, but apparently now we have some more.It’s still the case: We are short of money and need to print more, right, without inflation.Same in Japan: Their interest rates are actually negative — the economy is sick so won’t borrow or use money.

        2. sigmaalgebra

          What about the 25% or more of the population that this would bankrupt?

          1. andyswan

            Pick up a shovel, learn a skill and vote for spending you can afford

          2. ShanaC

            what is they have a skill, are working at that skill, and paying the tax would basically klll that job/skill by making it either too expensive to do or totally exportable/robotcizable

          3. sigmaalgebra

            Won’t work. The US economy is awash in people and skills; there is just a horrible shortage of jobs.One way: Be a citizen of a poor country. Work illegally in the US, live like a slave with no intention of having a home or family. Save nearly all the money. Work in the cash economy and f’get about taxes, etc. Save nearly all the money.Then, secret sauce, presto, bingo, make the money worth 10-100 times more, enough for a home and family. How? Return to the poor foreign country and take the money along. Done. And that’s what is being done.US citizens can’t do that.So, basically we’ve got ballpark 94 million people out of the labor force because Microsoft, Intel, Google, Facebook, Goldman Sachs, Citi, Boeing, etc. are so successful selling outside the US that the US dollar is very high and short term illegal labor takes advantage of the exchange rate of the high dollar. So, the 94 million US citizens are pushing a big rock up a steep hill of exchange rate.

  14. dpxxdp

    This doesn’t make any sense… would you be able to write off the losses if they’re never exercised or exercised at a lower price than you paid taxes on?

  15. Diego Recondo

    Along these lines, in countries such as Spain and Germany stock option taxation is a big burden for startup employees. As a result, they are frequently replaced by so-called “virtual” or “phantom” share schemes that often vest as regular stock options (1+3), yet they are not shares as such (i.e. the employee never becomes a stockholder). In case of a liquidity event, the employee has a right to receive X amount of money according to the value of her phantom/virtual shares (which will depend on the company’s valuation. etc.).

  16. Dan Moore

    If you’d like to read the language yourself, it is in this PDF:….Approximately page 122. They do a good job of explaining the current system and the change that would be made.

  17. Drew Myers

    This has already been “fixed”. See an excerpt below from the November 10th daily newsletter:House Tax Reform Bill Ways and Means Committee ResultsFollowing additional revisions that were released before the bill was voted out yesterday, below is a summary of the current House language as it relates to our tax reform priorities:* Carried Interest Capital Gains: Carried interest arising from assets held shorter than three years will now be taxed as ordinary income due to a provision included in the modified mark. This means that capital gains rates will still apply to assets held longer than three years. We are pleased that the House Ways and Means Committee has heard our perspective that carried interest based upon holding periods is a much more sensible way to view the issue than blunt changes to the policy that would treat a quick flip of an asset the same as real value created over a number of years. While this is an encouraging sign, please remember: this is still just the beginning of this process; there is a long way and a lot of challenges we will face from now until the end of this process.* Qualified Small Business Stock Rules/R&D Credit Offset: Both QSBS and the ability of early stage startups to offset payroll tax liabilities with R&D credits have been preserved.* Stock Options: We successfully fought against a provision (Section 3801) in the tax reform bill that would have required payment of taxes on non-qualified stock options as they vest, rather than when exercised. This would have been a radical and devastating change to the taxation of equity-based compensation, and hit those working at startups across the entrepreneurial ecosystem with tax bills on unrealized income. Further, because a large percentage of startups fail, Section 3801 will force taxes to be paid on income that will never be realized. Through the leadership of Majority Leader Kevin McCarthy (R-CA), Rep. Cathy McMorris Rodgers (R-WA) and Rep. Erik Paulsen (R-MN), we sustained a campaign asking the committee to drop Section 3801, which after a long and challenging week they did yesterday afternoon in one of their final changes before passing the bill out of committee.* Stock Options Part II: Once they dropped Section 3801, the House bill became a positive force for stock options and employee ownership because Rep. Paulsen’s Empowering Employees through Stock Ownership Act (EESO) was included as an amendment. This NVCA-supported legislation will allow employees at many private companies to defer paying taxes on exercised stock options for up to 5 years after vesting or until the company goes public.* Capital gains rate: unchanged.

    1. Dan Moore

      This excerpt refers to the house bill. Do you know if the Senate Bill has been modified as well?

      1. Drew Myers

        It wasn’t included in the Senate Tax Reform Bill at all. Excerpt below:Senate Tax Reform Bill UnveiledWe received details about the Senate’s tax reform legislation last night. As we dig through the bill, we want to share a few notes on the issues we’re tracking closely, provide a review of where our priorities stand in the bill which the House Ways and Means Committee just passed, then provide some comparison between the new Senate bill and the House bill. We’ll be back in touch as we learn more about this bill and as the process unfolds.Process:With the Senate bill out, we expect the Senate Finance Committee to go to markup next week. At the same time, we expect the House to bring their bill to the floor next week and work to get to 218 votes necessary for passage. The vote count is not there yet in the House, but it’s likely the House Republicans will be able to muster the votes necessary for passage and Senate Republicans will get their bill out of Senate Finance Committee before Thanksgiving.How the Senate Bill Deals with Issues Directly Affecting the Ecosystem:* Carried interest capital gains: No provision affecting carried interest is included. However, as with the House process, we fully expect to see one before the end of markup. There are conversations about whether to put the 3-year hold period provision from the House bill in or go to a more severe proposal that would tax most carried interest as ordinary income. We are also preparing for amendments on the issue during the committee process.* Nonqualified deferred compensation (taxation of stock options at vesting): A version of the proposal is in there, but from the concerns we have raised, it sounds likely to come out. If it does not, we are prepared to sound the alarms. This was a huge issue that we fought against in the House process once we discovered it, and were pleased to see it come out right before passage of the bill.* Capital gains rate: unchanged.* Stock option tax deferral: Not included in the bill.* Qualified Small Business Stock rules: Preserved.* R&D credit offset: Preserved.* Pass-through business tax rate: Carves out service businesses, including financial services. As with House bill, we believe this means the lower rate will not apply to VC partnerships.* Worker classification: There are several provision impacting worker classification which could have some impact on sharing economy companies. One would create a safe harbor for service providers to not be treated as employees. The other would increase the threshold for certain reporting of payments by marketplace platforms.

        1. fredwilson

          Wrong. It’s in the Senate Bill right now. Look at page 122 of the latest draft

          1. Ajay Sudan

            Page 123 states: “However, it is intended that statutory options are not considered nonqualified deferred compensation for purposes of the proposal.” I very well could be incorrect, but my understanding is this means that ISOs are not included here. Also, RSUs of public companies are already taxed today as ordinary income upon vesting.

      2. fredwilson

        It’s still in the Senate Bill. I explained in my post that we got it taken out of the House Bill late last week

    2. Steven Kane

      What he said. 🙂

  18. michaelblend

    We’ve been using LLCs with restricted units for the last 10 years. Much better tax treatment although a slight inconvenience for investors

  19. Guy Lepage

    Thanks for posting this @fredwilson:disqus. This is super important.

  20. Rob Sobers

    I can see how this would be a nightmare for options, but would it matter with RSUs? RSUs are currently taxed on vesting and you can usually sell a portion of your shares back to the company in order to cover your tax obligation.

  21. Frank W. Miller

    I am actually in favor of this. I nearly got burned by this during the dot com days. I was lucky because of, well, luck. I’ll have the story for you shortly.

  22. PhilipSugar

    I agree this is about payback and that is never a good way to make decisions. And it would very much hurt startup employees. Same for property taxes in Costal StatesI do find the irony of ignoring that the majority of people who voted for Trump did because they were ignored epic.Jaw-dropping epic.The political, media, costal, technology elite have come up with every reason he won other than acknowledging the middle working class in the middle of the country was angry at being ignored:Fake NewsRussiansRacistsElectoral College (well that is true, but it was setup precisely so people from small states wouldn’t get ignored)And that was Jeb too.Which btw it is in the Senate not the House.

    1. sigmaalgebra

      Electoral College: A terrific error correction protocol, say, like error correcting memory (ECC) in computing or error correcting coding quite broadly in algebraic coding theory (Hamming, Reed, Solomon, etc.).How? Without the ECC of the Electoral College, each 1 vote dispute in various sleazy voting districts could, likely would, hold up the declared, official outcome of the whole election for days, weeks, months, years as the lawyers got fat again.So, we have to quibble about disputed votes ONLY in states where the competition is really close. THEN throw that into the House of that state.Saint Laureate Al Guru can gripe about FL if he wants, and he does and does, but dems da rules.Or, it’s just CRUCIAL, as in avoiding possible, likely civil wars in the streets, to get a solid decision quickly. If the election was really too close to call, then just call it anyway, by in effect flipping a coin if necessary.As the ancient Greeks concluded, democracy is fighting at the ballot box instead of in the streets. Or the ballot box can give a good and bloodless prediction of which side would win a fight in the streets and, thus, avoid the fight.Some of the ancient Greeks were bright guys.It’s a great saddle in the two person game! Before the election, get both sides to agree. So, each side thinks, “I’m sure I’m strongly in the majority so stand to win any even roughly fair election. Then I get the power without blood. But if it turns out that I’m strongly out of the majority, then I avoid spilling all my blood in losing a war for free. So, I should agree.”Our Founding Fathers were bright guys, not dummies.So, now we can have gravestones voting, some district in CA with more registered voters than residents, lots of funny business, etc., and still get by.This is Polisci 101. My brother, Polisci Ph.D., explained it talking down to his math student younger brother!

  23. Jon Smirl

    One thing that would make the system fairer is to allow individuals paying for their own health insurance to deduct the premiums without being subject to limits. It is very unfair that the people with the good jobs get tax shielded insurance via the employer deduction, but individuals who aren’t fortunate enough to get employer insurance have to pay with after tax dollars.Alternatively we could eliminate the deductibility of heath insurance for employers. I just believe that the government should be consistent on this one way or the other.Paul Ryan is aware of this and has mentioned how unfair it is multiple times in TV interviews.

    1. PhilipSugar

      This is about payback and that is total bs. See my comment. You are going to get taxed if they every become liquid enough to sell. Until then nobody really knows the value. See my comment.

    2. Richard

      Why long term care insurance isn’t fully tax deductible is also baffling.

  24. DJL

    Both of these bills are a tangled mess. And this provision makes no sense to me.But I don’t see the political angle. I can see Trump wanting to hit back at Big Tech and VC since these groups were universally and loudly against him. But the Senate Republicans? They work against Trump in most cases. There is more to it.I personally believe both the House and Senate are creating bills that are designed to fail. This is so they can say “see, we did our part” and then kick the can down the road. Just like Obamacare. The Washington Establishment has one single, unifying goal: Make sure that the Trump agenda fails. Never discount this in your analysis.

    1. PhilipSugar

      See my comment. The Washington DC crowd positively and universally hate Trump. Of course they would he is a threatening force. But this is targeted. It is so specific and in the weeds it has to be, you can go back to your constituents and say look I got one on those tech hipsters. It’s absolutely moronic, because technology is portable and if you are all about America, all you are doing is making the chances the next Google, Facebook, or Uber comes from another country. You are going to get your taxes if and when it really becomes worth something, because until you sell it is a number on a piece of paper.

      1. DJL


    2. LE

      I can see Trump wanting to hit back at Big Tech and VC since these groups were universally and loudly against him.Nobody was mature wise or had balls enough to understand ‘keep your enemies close’ and to keep a seat at the table so they could have a say and have some influence and limit the damage. This is just so stupid. Instead they cowered to the masses who whined and complained and who thought things would be better by forming a resistance. Such a lack of understanding of human nature is truly (can’t even think of a word to put here).

      1. DJL

        And these guys are supposed to be the best and brightest in the room, right?This where I think Trump is outplaying them all.

  25. andrewwatson

    A very good tool for reaching out to your members of Congress is a project I’ve worked on called ResistBot. Text “resist” to 50409 or go to to learn more.ResistBot will have a conversation with you over SMS, FB, Telegram etc and then turn it into faxes, letters and emails to your elected representatives.

    1. kidmercury

      that’s pretty cool. well done! 🙂

  26. Frank W. Miller

    Here’s the story. In early 2000 (Mar or Apr I think), I was lucky and privileged enuff to be part of a $300MM acquisition of a small (30 engineers) telecom hardware startup. I was a line engineer but the CEO liked me and doubled my shares about a month before the acquisition. We also had 100% acceleration clauses in our employment contracts. It wasn’t FU money, but it was definitely life changing.The shares were ISOs (Incentive Stock Options). The options become taxable on exercise. Myself and many of the others exercised on the deal close day with the intent to start our clock towards long-term capital gains, to cut our tax liability in half if we could. That did not happen.Over the course of the next year, the stock price steadily declined. I believe at the date at which long term would have been reached, the stock had lost more than 60% of its value. There were two types of employees here, 1) those that had decided to pay the tax liability immediately (usually be selling a few shares off to cover it) and 2) those that did not. I was lucky (as it turned out) because I covered at the time.So, its a year later and your sitting there (if you did not cover) with a gigantic tax liability that most people could not pay since the shares had lost value. This was not a unique situation to me. At the time, dozens of large acquisitions had been taking place so there were many many people (1000s anyway) that had fallen into this situation. People lost their houses, cars, wage garnishment, this whole 9 yards. I was lucky since I paid the taxes, I did not have to go through any of that.Here’s where the real luck comes in. In 2009, there was a little known codicil written into the TARP that was passed in response to the housing bubble mess. This clause absolved the debts of those that had not paid their taxes and, get ready for it, refunded the taxes of those that had paid at the time. This was like winning the lottery lucky which I acknowledge.Here’s the punch line. This was sick to your stomach all the time type stress. I was LUCKY that I did not get completely wiped out financially at that time. If the tax code allows for this terrible situation to occur to a taxpayer, whether they were stupid or just unlucky, it should be fixed. Dealing with tax issues is like dealing with Death itself and the system should be setup to prevent thing like this from happening. If changing the taxable event status of these things can do that, I’m in favor of it.

    1. Neilb

      Hi Frank,I fell into the wiped out category, as my tax was not covered by share sales. Do you have some information or link on the TARP clause?

      1. Frank W. Miller

        I originally saw the story about it in the WSJ. This would have been, oh, 2010, 2011 time frame. I then contacted my accountant and they verified through the tax laws at the time. I just googled around for it and didn’t see an obvious link to it. I’d ask a tax person.

    2. PhilipSugar

      Respectfully your story illustrates why this is such a bad idea. Until you have cash in your hand you have a piece of paper. Now I can live with the company goes public you can exercise your options or the restrictions on your shares goes away that it is a taxable event. (because it seems in this case you could sell for cash) Now if there is a lockup period then that should extend it.Let’s take an extreme example. You are working for the next unicorn. They do a raise at a $1B valuation. They want you bad so they give you RSU’s worth (the auditors say and your management worked them hard to get the number as low as possible) $250k. You take out a home equity loan to pay the tax of lets say $100k. That is what this bill says.You have no possibility to sell this shares.Then:The company has to do a down raise, and there was fully ratcheting anti dilution, participating preferred, warrant coverage, with control provisions. You end up with a $100k loan to pay off.On the other hand the company sells out to some highflier for $5B in publicly traded stock. Your shares are now worth 1.25mm. Depending on the situation you still owe tax on the $1mm. The highflier comes back to earth.You are in the same situation you described.I assure you this does not help startup employees one bit. As Fred says it doesn’t affect him. There is no way to tell what RSU’s are worth in a startup much less options. (I know there is the Black Sholes model, I took Fin6 at Penn, but that has so many assumptions built in the make it worthless for startups, it’s not even accurate for public companies, if it was people wouldn’t trade options)I don’t know if the troll that Fred responded to is real, but I am telling you as I posted this is payback.

  27. Pranay Srinivasan

    Issue promissory notes with RSUs or Options underlying the notes and let them vest as a balloon triggered by either a time period or an event.That way nothing vests monthly or is even considered due monthly since the instrument is now just attracting an insurance premium monthly thats a deductible expense, not a payment for the shares.Just in case the Senate doesn’t care.

    1. ShanaC

      Is this legal currently according to the IRS code?

  28. Rick Bullotta

    …and bring back income averaging! Nothing hurts an entrepreneur more than the painful taxation during an exit year, even if they worked for nearly nothing the prior 7 years!

    1. LE

      Big thumbs up on this point. The swings of entrepreneurship income can be brutal. The ‘year’ is arbitrary as far as when it starts and when it ends relative to business income. And it has to do more than with just exits. Some businesses have income that varies greatly from year to year for a multitude of reasons (not just an exit).

    2. PhilipSugar

      What a great comment and Schedule 128 on the capital gains.

    3. Pointsandfigures

      As an investor, you get a tax free return up to a certain point if the company you invested in was less than $5M in assets, and operated for more than 5 years, and was organized as a C Corp. Entrepreneurs should get that same sort of tax break given we are seeing declines in entrepreneurship all over the board.

    4. Watson Ladd

      Excuse my ignorance, but why isn’t that long-term capital gains?

  29. Richard

    The compromise should be tax when exercised but as ordinary income. Everyone knows stock options and salary are essentially fungible.

  30. Matt Haggard

    Have a link to the bill’s text?

  31. Scott Gutterman

    Fred, I think this is really concentrated in the options discussion as most RSUs are distributed upon vesting and taxes are withheld by the company. For example, if 100 shares vest, the employee receives 50 and the other 50 are used to pay taxes at ordinary income rates.

  32. Simnett

    #notalawyer. Why not have employee stock go into a different ABLesop (All But Liquidity), or convert to series Q unpreferred convertibles, with no ownership or voting rights until liquidity (but no other conditions) upon “vesting”? secondary market, employees who leave, cap table management tbd, and perhaps too obviously a tax dodge, but this is close to the reality of the situation anyway…ps- Call your Senators!

  33. Pascal Aschwanden

    The current plan of taxing upon exercise is bad enough because most of the time you have to leave the company before the options have any value. So, I tend not to value shares at all when making employment decisions.The chances of those options ever reaching any value at all, is infinitesimally small.If they tax upon vesting, I will reject those shares at the time of hire. I don’t want them.

    1. Tom Labus

      I just saw that. Where’s William..Anyway. Tax revenue goes up almost every year since 1960 regardless of taxes. We have record corporate profits but wages are stagnant and the middle class has been in limbo for 40 years.

      1. ShanaC

        I don’t know what is going on

        1. Tom Labus

          Kicked off? Or hacked?

          1. ShanaC

            None of the above -device and location issues on JLM’s end

    2. Matt Zagaja

      Government conspiracy?Russians?Col Mustard in the Library with the Candlestick?

  34. zz

    christ… republican congress can’t not fuck people not matter what they do

  35. PapaBear

    Its purely political. Just ask yourself two questions: Q1: What % of the eligible workforce benefits from ISOs & RSUs?Q2: How many companies offer employees Options and RSUs & where are they located?

  36. sigmaalgebra

    Well an RSU is a TLA, that is, a three letter acronym. Okay, okay, I’ll Google it:Presto, bingo (think computers will ever catch on?):The restricted stock units (RSU) are assigned a fair market value when they vest. Upon vesting, they are considered income, and a portion of the shares are withheld to pay income taxes. The employee receives the remaining shares and can sell them at any time. Gee, that vesting, RSU, claw back, full ratchet, 2X liquidation preference, etc., BOD (board of directors) care and feeding, meetings with lawyers, trying to find room enough for all the file drawers for all the documents for the details for the term sheet and the Delaware C corporation papers, all the filing deadlines and filings, the bookkeepers, accountants, auditors, and more lawyers, then more lawyers, paying for the travel and lodging for the Members of the BoD (first class air fare, 24 x 7 stretch limos, four star restaurants, five star hotels, breakfast with unlimited organic red and black raspberries, catered lunches, nights out with $20 drinks at a place with loud, live, rock music and nearly naked young women with pretty faces and perfect figures dancing on the bar, etc.) would be a full time job and a business just on its own.But, my Congressman, Faso, is on the House Budget Committee, has asked his constituents for any feedback, and I have a letter in draft I’ll be able to send via FAX. He has already mentioned that he is concerned about taxes for small businesses — he will have to mean small startups, too. So, maybe I’ll include this vesting and RSU stuff when I send my FAX to him.But, there’s an easier way: E.g., long ago there was an Ann Landers column answering a worried house wife: She did the laundry on Mondays (gee, are there any women left who can do laundry?) and, then, was too tired for her husband who also wanted to make love on Monday.The Ann Landers answer? Do the laundry on Tuesday!As a person who has seen some realpolitik, I have to expect that vesting, RSUs, carried interest, as at Google again,Carried interest, or carry, in finance, is a share of the profits of an investment paid to the investment manager in excess of the amount that the manager contributes to the partnership, specifically in alternative investments (private equity and hedge funds). won’t change.The business, the economy, investing, finance, etc. are not simple, no matter form on one 5 x 7″ card. For people with little or no money, the tax laws can be quite simple. For people manipulating, managing, making a lot of money, the tax laws stand to remain complicated.I like Trump a lot, but I have to suspect that maybe he has learned some realpolitik lessons. Only maybe because, sure, Trump had been working with politics and politicians very successfully in NYC, the US, and around the world for decades and, no doubt did very well with a lot of realpolitik lessons, but maybe, and I’m not sure on this, Congress and the lifers in the Executive Branch may have given Trump some new lessons.Or, sure, maybe for Trump: He’s just a bang beat bell-ringin’ big haul, great go, neck-or-nothin’ rip-roarin’, over-time-a-bull’s-eye SALESman … Fine with me.Extra credit for knowing the source!Whatever the reality, some of what Trump outlined during the campaign may be too simple and optimistic. Maybe he knew that then, maybe not.In particular, looked at in detail, Trump’s tax cut plans may often have be less exciting and simple than he wanted.Here’s a maybe: Mitch McConnell and Paul Ryan may have their own backs that need scratching, maybe don’t want even to give away the time of day without something in return, maybe PAC donations, find going slow a good way to get more donations, certainly don’t want to pass lots of bills right away that, going slow, could result in lots of good back scratching, don’t want Trump to become more popular and, thus, more powerful and, thus, leave them (McConnell and Ryan) with less power. I look at McConnell and see a guy super happy and secure in some sweetheart, powerful position where he feels dominant and invulnerable — ah, pride goeth before whatever? Maybe. But Trump has been successfully moving powerful politicians for decades. Ryan and McConnell better get on the team, the Trump Train, before they get run over as the train moves ahead.Anyone who can fly around in their own Boeing 757 and pay for Melania’s clothes budget understands something about money! Uh, some of the newsies wanted to claim that Trump was broke: Well, he wasn’t before he paid for his last 757 fuel bill or Melania’s last clothes shopping excursion! For that 757, if you have to ask how much it costs to run it, e.g., with those RR engines, you can’t afford it.IIRC, there was a deal: The Trump tax changes, as evaluated in simplistic, marginal ways, by the Congressional Budget Office will be permitted over 10 years only $1.5 T in increased budget deficits. That constraint, if honored, may be a big ball and chain on the economy.Of course, there’s a chance that this $1.5 T thingy is total BS: Why? Taken clearly, literally, and meaningfully, even Obama didn’t run more deficits than all previous presidents combined because by year 2000 we had nearly paid off the whole darned national debt. How? From the best of the crude newsie information, the Reagan tax cuts got the economy going fast enough to pay off the debt. So, really Obama (I HATE ever again to hear that name) ran up the debt only since year 2000 when it was near zero. Whatever that dirt bag did, Walter Heller under JFK (when he wasn’t playing with plastic ducks in a White House bathtub with Mimi Alford or grabbing her as Trump described on the NBC tape — where he never said he actually did such a thing) or Stockman or some such under Reagan may have been on to something: To get the golden eggs, can’t just choke or starve the goose.Okay, if the vesting, RSU, and new tax law stuff is too much, then for compensation, etc., do something else!What else? Let’s see: A startup founder can one fine day just decree and declare, alone, just between his ears, silently, that he is the CEO of his own business, a sole proprietorship. No lawyers or taxes. Ah, business friendly US! And, presto, bingo, on vesting and taxes, he already owns 100% of his business with no taxes due. As long as he continues to own 100%, no taxes will be due just from his owning and vesting.Then if he gets some revenue, he can file with the IRS as a Subchapter S. IIRC, he can just do decree and declare. No lawyers needed.If he is still small and growing quickly, then with some of Trump’s planned tax changes, he can expense not just opex but also capex, right away, and, thus, owe $0.00 in taxes.Also, he might find some highly volatile security, take offsetting long and short positions, and just before midnight on December 31, close out one of the positions and just after that midnight close out the other position and, thus, move the money to the next tax year, as in some math of moving the mass out to infinity. Commodity traders used to do this, but there was a law. I suspect that a sole proprietor could still do such.”Taxes? What taxes? We don’t need no stink’n taxes!”Later he can get some legal boiler plate and convert to an LLC, e.g., for the personal protection of limited liability in case of some nuisance law suits.Want my LLC? Okay, fine. You’ve got it. The trademark? My LLC leases that from a little company in Bermuda. The software? Same, leased. LLC earnings? There aren’t any because of the lease payments to the Bermuda thingy. Indeed, my LLC is behind on the lease payments, but the Bermuda thingy is being understanding.Want to get the software, secret sauce, proprietary intellectual property? Lots of luck: That’s owned by another thingy in Bermuda and is not in the US at all.So, now that you have the LLC, I’ll form another one and startup up again, same trademark, domain name, etc. in 60 seconds after midnight some fine day. Or some such.The office furniture, the computers, etc.? All leased. What does my LLC actually own? Tough to find anything.So, as my LLC increases in value, I just continue to own 100% of it all without any “vesting” or taxes on increments of vesting. I own 100% of it and never paid any taxes at all on just that ownership.So, that’s a way to do the laundry on Tuesday.I’ll still write Faso, but getting all wound up over C corps, lawyers, vesting, tricky taxes, etc. could kill my startup.It’s clear enough that Congress understands this and, thus, lets a sole proprietor have business, at first, essentially just by letting him think he has a business. Then he can register his trademark, tell the county he is “doing business as …”, etc. Minimal stuff.Business can be much easier now: For a server for capex less than $1500, with a Web site, kept half busy on average 24 x 7, a business can, just from ordinary ad revenue from ad networks, generate enough revenue to buy another server is weeks or even just days. So, for early on we’re talking exponential growth with doubling time so short is makes rabbits look like 99% celibates.Then the issue is not a lot of lawyers but revenue and earnings, — the universal, uniform, unique magic potion cure for all issues in business.By the way, IIRC, Trump’s businesses are private.

    1. Michael Elling

      I believe liberalization of telecom policy towards a pro-competitive environment of choice (driven mostly by Democrats in the 1980s-90s) was the biggest reason for US growth. That and maybe the securitization of risk (aka kicking the can down the road). Digital network effects overwhelms everything else. Tax policy was not the main driver.

  37. Alex

    RSUs are already taxed upon vesting.

  38. sachmo

    I don’t know if most people on here called, but I actually did. It took about 10 minutes, I spoke to a polite staffer who took notes on the conversation and promised to relay my input directly to the Senator of my state.I am open to changes in our tax code and even around granting options, but I think taxing people on what are essentially IOU notes is ridiculous. I hope other people take 10 min and make a call.

  39. Salt Shaker

    The fact this is even under consideration reflects the naïveté of our gov’t w/ respect to how biz gets done today. You have a Pres who touts economic growth during his short tenure in office, while Congress considers creating two-legged stools. I guess Jared, who supposedly has a role overseeing economic development for the admin, failed to take Start-Ups 101 at Harvard. Tax legislation is starting to smell like another big cluster fxxk.

  40. Jose Vieitez

    Wouldn’t this be great for startups whose shares are worth $.00001 as they vest?

  41. Eoin McMillan

    This is how the Australian taxation system runs (or used to run). It was a disaster for startups when I left 5 years ago and was the no.1 issue by startup founders in a white paper to the government on what needed fixing to boost entrepreneurship in Australia.Don’t know more than that, but it should be easy to find examples oh how this disincentivized entrepreneurship in Australia, with people moving elsewhere to start their companies instead.

  42. Patrick Dugan

    You could have a bonus policy based on a formula that resembles a ladder of European-style options that cash-settle every bonus period. You could ladder it out for years. Formulaic bonuses: instant tax savings, same logic.


    Why not simply change the existing structure of smaller time based vesting cycles? If possible, why not have it based on the termination of ones employment, after 5-years, or up until the next round of funding?Am I wrong to think that this could potentially transform the way ISOs vest at startups to the benefit of the employee?We need better alternatives to vesting option cycles anyway as employees are much more likely to walk away from the worthless ownership stake versus exercising and cashing-out with a meaningful return. Is it possible this might facilitate a change that would force companies to be more competitive from this perspective and actually paying their employees on the options they’ve earned over time?

  44. MikeA

    Working for a US company it seems that only Australia currently taxes as income, upon vesting. Always seemed reasonable to me: the company I was working for, was giving me something that I could immediately cash in. Sounds like income to me?

  45. Manqueman

    This proposal won’t make it to a final bill. It’s just BS to give the appearance of having something that balances economically irresponsible tax cuts. At the end of the day, the only thing that might get passed are cuts and benefits for the 1% and a bill for same for everyone else.

  46. Keyvan Firouzi

    Hi Fred. Thanks for bringing this to the surface. I may be reading this incorrectly, but it seems like as part of the bill, they are repealing the ATM as it relates to the paper-gains of ISO as well. I understand that some people (~5%?) are receiving NSO and this would be a negative for them, but it would seem that the other 95% would benefit from removing AMT on ISO paper gain. Can you share your thoughts on that?

  47. Frank W. Miller

    Another point that I believe Fred should (if he hasnt done this already) do for his company’s that get acquired. Every one of the people that fell into the trap I described earlier would also have avoided the issue if they had been instructed about protective puts. It seems like a VC that should know about such things should take the responsibility and take care of their newly minted millionaires by telling them how to protect their just exercised shares from a terrible loss.

  48. Joe Wallin

    It looks like the description of the Senate Bill found in the “Chairman’s Mark” (…. contains a carveout for “statutory options” (presumably ISOs). Pretty big carveout. Wonder what will happen here. My vote is to not tax the transfer of illiquid shares in private companies at all. Let’s let the potential wealth spread.

  49. Jose Paul Martin

    Looking from the o/s US in – this is nothing but a hunt for taxes, as the government needs money!

  50. Drew Myers

    Ding dong, the dumb deal is dead.Sen. Orrin Hatch, chair of the Senate Finance Committee, released markups to the Senate tax plan, and gone was the bit about taxing stock options and restricted stock units at the time of vesting. Moreover, it largely mirrored a House plan to allow startup employees to defer taxes on exercised options until there is a liquid market for the underlying securities.

  51. Crash

    I apologize if this is a dumb question…but how’s the taxable value established of a pre-IPO un-exercised option?

  52. ZekeV

    I was going to make the same comment. One thing I would add (and from perspective of restricted stock grants as well) is that in an ideal world, we would make the opposite legal assumption — restricted property should be taxed on receipt, with an optional election to defer taxation until the restriction lapses (ie, it vests). This makes a whole lot more sense to me than the way we do it now.If the tax due on restricted property income is nominal, let’s just assume that people would prefer to be taxed on receipt. I can’t tell you how many founding teams have missed the 30-day deadline to file an 83(b) election. It is the first issue that I look for when I take over the paper pushing for a startup. Yes we can avoid this by being careful, but why not just make a rational assumption here.

  53. Frank W. Miller

    It has, but as you are observing, not many people know about it and certainly many startup CEOs have no idea. Had our management (see my story below) told us about this in 2000, many other would have avoided the tax crap they had to go through.Perhaps one small good that can come out of this is if Fred makes a point (if he hasn’t already) to get all his CEOs to get all their employees to do this…

  54. Richard

    This feels like much ado about nothing. Set the strike price above the market value at the time of vesting. The real gains are in the out years anyway.

  55. Sid

    83b is just an IRS regulation and not law. It can be changed or taken away by a simple stroke of pen. Plus its more unnecessary paperwork with a time bomb attached to it. Most people will need a lawyer or accountant’s help with it.

  56. ErikSchwartz

    83b is great for founders and pre-investment employees. But if you are coming in as an employee after a few rounds of financing it does not solve the problem.

  57. Alex MacCaw

    The 409a market value is very quickly unaffordable for most people.

  58. Simnett

    more to it than that, especially for later stage joiners (i.e. non-founders)- see, for example

  59. Jordan Frankfurt

    This was my immediate thought. Afaik (not much) 83b isn’t changing.

  60. Pete Griffiths

    “then almost non-existent market value”Can we assume this JLM?Are there not options that have meaningful market value?

  61. startupbroke

    AFAIK 83b only applies to your shares once you exercise, they cannot be applied to options; only shares.http://www.startuplawblog.c

  62. Ryan P O'Connell

    Most early startups issue ISOs, and this povision only appears to only affect RSUs (please correct me if I’m wrong). ISOs are where people get into trouble due to the huge value spread between strike and current market value. Once a startup has reached the RSU stage, it is usually about to go public or be bought, so this isn’t really a problem for the RSU crowd.

  63. Richard

    Yep, if you receive a deep in the money stock option, you should pay for it.It’s like telling the IRS not to tax my earned income because I don’t plan on spending it this year.

  64. ZekeV

    The concept is related to constructive receipt. The statute is about receiving property subject to nonlapse restriction. That is the statutory language.EDIT: so basically, the statute is and has always been a poor way to describe when a taxpayer has constructive receipt of valuable property.

  65. PhilipSugar

    There is so much other low hanging fruit to go after.You know from my comments I don’t sit there and say everything one side says or does is bad.But the thing is this affects mainly starry eyed kids really putting their all into a startup, not old men like us that will start with equity.

  66. LE

    Did something similar back in the day I guess was an installment sale. And that ’25 years’ takes a bit of the fun out of the big costly number.But in any case income averaging would help with smoothing out the swings of income differences from year to year other than the normal shenanigans and schemes that are currently available.

  67. JaredMermey

    Can you elaborate?

  68. Anthony Hurtado

    I was wondering the same thing. This looks like an RSU and a NSQO matter. Still stupid, but ISOs appear safe?

  69. sigmaalgebra

    > if Fred makes a point (if he hasn’t already)Back in May, 2011, there was mention of 83b at…but this URL is now dead.There’s a mention of 83b athttp://themusingsofthebigre…

  70. Adam Scarborough

    But a vested option is not earned income. Or income at all. If I make you an offer to sell you something at a reduced price, that you may or may not take up then it’s not income. The only thing you could consider income is the difference between the option price and sale price on the day you actually acquire the share…It is entirely possible to exercise an option then not sell it.

  71. Pointsandfigures

    not necessarily. What if I am an early employee of a blow out company and got options on the Series A and it’s now Series E? I took the early risk and should be rewarded for it. Joiners of startups are as important as founders.

  72. Richard

    think about that for a minute. The offer and acceptance is work in exchange for derivative of the stock. Its is income.

  73. fredwilson

    Hi LaTrinius – pls try to be nice in your comments here at AVC. we don’t mind opposing views, but words like “scum” aren’t necessary and just incite bad behavior by everyone.and this issue doesn’t impact “smug rich VCs” like me. i don’t get options or impacts the people who work in the companies i invest in.

  74. Christine Deakers

    TL;DR – Section III(H)(1) is to distract voters from what really needs to happen: hold billionaires accountable to pay taxes. Ask yourself… Do you think it would be fair to have to pay taxes on your monopoly money? That’s what they are essentially proposing. LONG VERSION: I never comment in the posts, but I’m doing so because we can’t be fooled by this rhetoric. The above comment is exactly why Republicans created Section III(H)(1). Republicans in Trump’s pocket want to be able to say, “See! We are taxing the wealthy in Silicon Valley.” However, this clause isn’t directed at the major executives/billionaires of the world, but middle class employees. The way this clause is built is to hurt average employees (titles like Support Engineer, Marketing Associate and Sales Development Rep etc.) I’m a biased POV, but as a Marketing Manager at a startup, I’m happy to be taxed on capital gains and the actual salary I’m paid. I believe in paying into a system that can support the government and social services. But people who work for startups shouldn’t be taxed on something that they haven’t even purchased yet, or might *never* purchase. The average startup employee gets a certain amount of stock options, which they have the *opportunity* to purchase upon vesting. Many people do not exercise (aka purchase) their stock options because they can’t afford it, or it just doesn’t make financial sense at the time, or ever. Many people in tech, despite the myth, don’t have tens to hundreds of thousands of dollars to spend it on stocks. It’s a complete myth that if you work at a startup, you’ll IPO, and get rich. In reality, some studies indicate the chances of a startup that receives VC funding successfully IPO-ing is worse than 100 to 1. Find me on Twitter @deakhaus – I’m happy to have a conversation on ways to really make an impact. And it starts with looking at those who are in charge, and if they are actually paying their taxes.

  75. JamesHRH

    You should try a world without rich people. It bites waaaaay harder than you think it does.Also, I missed the Amendment to the Constitution that guaranteed you a right to live in a coastal megalopolis.

  76. ErikSchwartz

    When the US treasury accepts illiquid options in private companies at the 409a valuation as a currency to pay your income taxes then we’ll be all set.

  77. PhilipSugar

    I think from the excessive language this must be an alias, a fake account.However, I have been beating the drum for the last several years that the average person in a non East or West Coast environment is feeling pretty unhappy.It was an unpopular viewpoint.I give you an open invite if you ever ride or take the train from Philadelphia to DC to host you and Joanne and we will go to just normal places (and then a great place for dinner)Stay at the Blue Max Inn Top 15 B&B: http://www.bluemaxinn.comIn the town that was rated the most beautiful in the state of Maryland…We won’t touring in my Volvo 2018 S90 T6 AWD. We will go in my 2001 6 inch lifted Chevy Sliverado. I’ll let Joanne drive and my wife can sit shotgun while we sit in the rear cab.

  78. Richard

    Last time I checked, an IRS levy would be more than happy to confiscate the illiquid options issued by your employer.Moreover, you can not pay your taxes with all but one form of property “US currency”I guess we are all setIts long time that all performance based income be treated equally for tax purposes.

  79. Richard

    Keep heading east, hop on the ferry and stay in cape may nj at the main stay bnb.

  80. Kirsten Lambertsen

    Yep, a few reasons to believe that LàTrinius may not be who he presents himself to be.

  81. PhilipSugar

    I give you the invite as well.