U.S. Senate drops proposal to raise taxes on startup stock options

SAN FRANCISCO, Nov 15 (Reuters) - The U.S. Senate dropped from its tax reform plan a provision that would have changed how startup stock options are taxed, a proposal that drew fierce blowback from Silicon Valley. The Senate tax bill had proposed taxing employee stock options, a crucial part of compensation at technology startups, as they vest. Options generally vest over a four-year period.

The result would have been annual tax bills for startup employees that soared into the tens of thousands of dollars, warned startup founders and employees. Startup options give employees the right to purchase shares in the future and are illiquid, meaning employees cannot spend or save their options.

The Senate removed that provision following heavy lobbying from the National Venture Capital Association and an outpouring of opposition from venture capitalists and startup founders.

"The entrepreneurial ecosystem can breathe a sigh of relief," said Bobby Franklin, president and chief executive of the NVCA.

Under current tax code, employees are taxed only when they exercise their options. (Reporting by Heather Somerville Editing by Marguerita Choy)