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The Senate provides a disastrous tax on the acquisition of rights that could kill the compensation of actions

A tax proposal that imposes start-up rights on people instead of cashing them in and having money to pay taxes could ruin the way technology companies recruit people. talents. And the industry does not have a lot of time to mobilize to change this tax.

The United States Senate released its tax reform bill late last week under the name of "Tax and Employment Reductions Act". It includes a tax on stock options and restricted share units (RSUs) that apply as they vest, rather than to use the existing regime that imposes the stock options or the underlying stocks.

As the famed VC Wilson of Union Square Ventures explains, "What this would mean is that every month, when your stock-based earnings will become a bit low, you will have to pay taxes even if you can not do anything. with this compensation, you can not spend it, you can not save it, you can not invest it because you do not have it yet. "

It's a huge problem. Because if you are not already rich enough, you might not be able to pay these taxes until you liquidate your equity for cash. The proposed tax could prevent large sections of technology employees from accepting stock options and PSUs. This breaks the entire incentive structure for the best talents to take on intense jobs in companies with a risk of failure because there would be more massive upside potential.

If there is no chance of getting rich because he is a former employee of a startup, the best talents will not take those jobs.

UNITED STATES – OCTOBER 4: Amanda Werner, disguised as Rich Uncle Pennybags of Monopoly, stands behind Richard Smith, CEO of Equifax, at a Senate Committee hearing banks, housing and urban affairs. Dirksen on the corporate security breach on October 4, 2017. (Photo by Tom Williams / CQ Roll Call)

Companies should turn to higher wages and big bonuses to attract the best employees. But startups often do not have the money to do it. They rely on free equity to distribute at the time and are only worth it if the company succeeds in attracting talent. This could push the best products, design, engineering and salespeople to work in larger and well established companies that can afford lucrative salaries and bonuses. And with fewer millionaires and billionaires made by equity, there will be fewer people investing in the next generation of startups.

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This in turn could reduce innovation, prevent the disorganization of aging giants and reduce the competitiveness of the US technology sector with the world.

There is no doubt that the technology industry is foamy, that tons of people accumulate tremendous wealth through equity, and that they could probably afford to pay for higher taxes. But that 's only after they've made their fortune by liquidating equity. A tax on the acquisition of rights discourages people from getting into the barriers.

Wilson recommends that people who want to fight to call their senator, discuss with the tax reform assistant and ask that this tax on the acquisition be changed or removed from the law on tax cuts and jobs. The Senate could try to pass the law before the end of the year. And if the acquisition tax becomes law, it could wreak havoc in the world of startups.