
This Single Tax Change Could Destroy the Startup Ecosystem as We Know It - danaseverson
https://www.inc.com/dana-severson/this-1-single-tax-change-could-destroy-startup-ecosystem-as-we-know-it-and-it-could-happen-today.html
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mankash666
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
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...](https://www.washingtonpost.com/news/wonk/wp/2017/11/03/how-
many-families-actually-own-half-million-dollar-homes/)

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...](https://taxfoundation.org/press-release/benefits-state-local-tax-
deduction/)

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.

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zekevermillion
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.

