The Senate’s bill would tax employees on those shares even before their potential gain is realized. As a result, employees may owe taxes on something they only have the rights to and don’t actually own.
“Generally it’ll put a deep freeze on recruitment of the best talent into high-growth, innovative industries,” said Leigh Drogen, founder and CEO of Estimize, a six-year-old company that collects and publishes financial estimates for data such as earnings. “There’s no way you could hire the best talent to a start-up or high-growth company. It’s just impossible.”
Drogen said Estimize’s roughly 20 employees collectively own about 15 percent of the company through stock options worth about $15 million in the next year or two. “That’s an order of magnitude more than our payroll,” Drogen said. The “risk they took to join us early on is dependent on that stock.”
The Senate is set to begin discussing the proposal as early as Monday. A spokeswoman for the Senate Finance Committee did not immediately return a CNBC request for comment.
“It’s really creating some heartburn in Silicon Valley,” said Dan Clifton, head of policy research at Strategas. “There’s some larger companies, not just venture companies, that are worried about this.”
That said, the Senate’s proposal on taxing stock options may not make it into the final tax law.
The House Republicans’ tax reform bill would only tax stock options when they are liquid, rather when an employee exercises the options.