Vermont Sen. Bernie Sanders just introduced legislation that's raising alarms in Silicon Valley. But this time, it's start-up workers, not Big Tech executives, who may be concerned.
Sanders and Sen. Chris Van Hollen, D-Md., introduced a new tax bill Thursday that would tax nonqualified stock options of more than $100,000 at vesting for private company employees making at least $130,000 a year. This means that instead of being taxed once they exercise their options, employees would be taxed on shares when they vest, even though they still wouldn't be liquid assets. Employees who meet the tax threshold would be taxed on assets they haven't yet accessed and possibly will never exercise.
Start-up employees are commonly offered stock options as part of their compensation packages. The idea is that the company's future value could offset the relatively small salary its able to offer at an early stage. Employees have the option to buy stock at a set price once their options vest, with the hope that the shares will be worth more at the point of purchase.
The bill overall is meant to collect more taxes from CEOs and other highly paid executives, but tech industry representatives and even Silicon Valley Democratic Rep. Ro Khanna, the co-chair of Sanders' presidential campaign, worry it will impact tech workers as well.
Khanna said in a statement to CNBC that "forcing employees in small start-ups to pay tax on stock before they have even had to sell it will hurt the start-up economy."
"This will hurt the ability to distribute wealth creation more widely for all employees, including immigrants and outsiders. Ironically, it could lead to more concentration of wealth for the venture capitalists, executives and founders of companies. It may disproportionally affect the rank and file — those who work hard and have a chance to participate in the startup value creation dream," Khanna said, adding he "look[s] forward to working with Senator Van Hollen and Senator Sanders to refine this."
"What I worry about is this would put start-ups at a huge huge huge disadvantage when it comes to competing with Big Tech companies for talent," said Evan Engstrom, the executive director of tech start-up advocacy non-profit Engine.
Engine pushed back on a similar provision in a Republican tax plan in 2017 that would have also taxed vested stock options. Before that part was nixed, hundreds of tech companies, executives and venture capitalists signed a letter to then-Senate Finance Committee Chairman Orrin G. Hatch, R-Utah, urging the bill's backers to reconsider, citing negative impacts for start-ups' ability to compete with larger firms.
But Sanders' office believes the tax proposal would be unlikely to affect the rank-and-file workers Khanna and Engstrom are concerned about at the thresholds the bill lays out, according to a representative from Sanders' Senate policy staff.
The bill still allows affected employees to defer taxes on their vested options for up to five years as is the case under the current tax code. In cases where employees may be impacted, companies would likely rearrange their compensation packages in ways that could be beneficial for employees, Sanders' office told CNBC, for example, by granting stock to employees on a certain date rather than vesting stock options that workers would still have to choose to buy.
Here's Khanna's full statement on the tax legislation:
"There are many ways to raise revenue such as a wealth tax, an employer payroll tax, ending the carried interest loophole, and repealing the Trump tax cuts that I support enthusiastically. But forcing employees in small start-ups to pay tax on stock before they have even had to sell it will hurt the start-up economy. Perhaps employees at public companies can pay this tax on vesting, but not private start-ups where there is no public market for the stock.
This will hurt the ability to distribute wealth creation more widely for all employees, including immigrants and outsiders. Ironically, it could lead to more concentration of wealth for the venture capitalists, executives and founders of companies. It may disproportionally affect the rank and file — those who work hard and have a chance to participate in the startup value creation dream. This is the office manager, executive assistant, junior engineer, individual contributors in marketing, finance, and administration.
We should have higher taxes on the wealthy, and have our big corporations pay more tax. But I don't think the solution is going after ordinary employees at startups. We need a more nuanced approach, and I look forward to working with Senator Van Hollen and Senator Sanders to refine this."