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HometaxesSilicon Valley is freaking out about this provision in the Senate tax...

Silicon Valley is freaking out about this provision in the Senate tax bill regarding stock options

  • The Senate's tax reform proposal released last week would tax stock options when employees receive the right to them.
  • Venture capitalists and start-up founders say the proposal would severely limit the ability for U.S. companies, especially in tech, to compete.
  • "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, which collects and publishes financial estimates for data such as earnings.

From left Amazon founder Jeff Bezos, Alphabet CEO Larry Page, and Facebook COO Sheryl Sandberg listen during a meeting with technology industry leaders at Trump Tower in New York, NY on Wednesday, Dec. 14, 2016.Jabin Botsford | The Washington Post | Getty Images

Start-ups are worried about one part of the Senate's tax reform proposal that would hurt their ability to compete: taxing stock options when they vest, instead of when they are exercised, as is currently done.

Companies, often Silicon Valley start-ups such as Twitter, typically compensate employees with the promise of being able to cash out on the company's stock in the future. Usually, the right to those shares is distributed over time, a process known as vesting. Stock options are currently taxed when they're exercised, or sold at a set price.

The Senate bill if it became law "would be the end of equity compensation in startups as we know it," Fred Wilson, managing partner at venture capital firm Union Square Ventures, said in a blog post Monday.

"If this provision becomes law, startup and growth tech companies will not be able to offer equity compensation to their employees," Wilson said. "We will see equity compensation replaced with cash compensation and the ability to share in the wealth creation at your employer will be taken away. This has profound implications for those who work in tech companies and equally profound implications for the competitiveness of the US tech sector."

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