Bernie's proposed tax on vesting stock options

Senator Bernie Sanders and Chris Van Hollen introduced a bill titled “CEO and Work Pension Fairness Act”. You can read the bill here or get a quick rundown from Dan Primack at Axios here.

The bill is purportedly proposed to end tax advantages for CEOs and founders of private companies. I am all for fair taxation and raising taxes for the wealthy, but that argument is going to reserved for another blog post. This is focusing on the collateral damage of this proposed bill.

If enacted, this will greatly affect start-up employees and their equity compensation. The proposed bill will tax stock options at vesting for employees who make more than $130k a year and have more than $100k of vesting stock.

What does this mean? Start-up employees may be required to pay tax on options that they do not intend to exercise and likely cannot even sell. This is terrible policy that makes the regulatory issues associated with stock options even worse.

This is just the latest example of how disconnected Congress is in regards to how stock options (and taxation) work.

Start-ups will have to greatly reconsider their equity compensation plans which is a large part of the appeal of working for a start-up. Small start-ups give out equity to increase employee ownership and as a way to make up for the income gap as they cannot afford to pay their employees what a larger more established company can.

While far from perfect, granting employees stock options in the company has largely worked. It is a big reason why I joined Secfi and I know I’m in the majority who would say the same.

Stock options very simply is a form of deferred compensation. It really is not that much different than a company saying that we cannot pay you a bonus now, but if everything works out in X years, then we can give you a bonus then.

Using that simple example, it would not be fair to tax an employee on that promise for a cash bonus if X, Y, and Z targets are hit. The employee did not get the cash that year and it is not guaranteed. They would still have to hit X, Y, and Z targets in future years before that bonus materializes.

A stock option is not that different than that cash bonus example. It is effectively worth nothing until there is an exit or liquidity event which only happen if the company does well. Employees should not be taxed on those stock options as they are not guaranteed to ever be worth anything.

There are other ways to tax the wealthy. Enacting a bill like this would be disastrous for all parties involved and would directly hurt innovation.

Congress has proven time and time again that they are disconnected with the realities of stock options and have absolutely no clue how they work or their intent. Let’s hope Congress gets a grip and fixes this before it gains traction.