Tax reform bill could be a huge boon for start-up employees

Key Points
  • A tax reform bill issued by House Republicans could make it easier for start-up employees to exercise their stock options.
  • The new plan makes stock options taxable only when shares in a company are liquid, and not up-front when an employee exercises their options.
Flanked by Speaker of the House Paul Ryan and House Ways and Means Committee chairman Rep. Kevin Brady (R-TX), President Donald Trump speaks about tax reform legislation during a meeting with members of the House Ways and Means Committee in the Cabinet Room at the White House, November 2, 2017 in Washington, DC.
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House Republicans issued a tax reform bill on Thursday with at least one feature that start-up employees should be excited about-- a provision that would make it easier for them to exercise their stock options.

Venture capitalist Keith Rabois, who is also executive chairman of real estate platform OpenDoor, praised this aspect of the GOP's tax plan on Twitter (although he was not pleased with the rest of the bill):

Stock options are one major reason that people who could command higher salaries elsewhere will work for, or create, a new company. But today, employees have to pay taxes up front when they exercise their stock options, with share prices set by the company. That can be a problem for people without cash on hand.

Existing tax laws around equity-based compensation can even drive a company's employees to let their options go, and miss out on the future windfall when that start-up goes public or is acquired at a good price.

The CEO and President of the National Venture Capital Association, Bobby Franklin, said in a statement:

"We are pleased the House Ways and Means Committee...[included] an NVCA-backed proposal to allow startup employees to defer taxes on their exercised stock options without a liquid market to sell them." The NVCA views this policy, and some others in the Republican tax plan, as encouraging new company formation.