Startup companies gained a substantial win from the U.S. tax overhaul, the chance to get rid of the burdensome tax bill that comes with a company’s stock options.
To be eligible for the tax break, companies must provide stock options at minimum 80 percent of their employees, a requirement that could encourage these startups to increase the option wealth.
Employees with options are typically required to implement use them within 10 years or three months after leaving. According to tax experts, the gains on the shares is taxed as income and the tax bill can quickly rise to a substantial amount at a successful startup.
But, employees can encounter large obstacles if the company is not public and they are not able to sell shares to pay their taxes. With the new bill, private-company employees have the option to postpone those taxes for up to five years.
“I feel a sense of relief that I have more time to figure things out,” said Jamil Poonja, head of public policy and communications at a startup, in which part of his compensation is in options.
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Startups differ on how stock options are granted to their employees. The most common method of venture-backed companies gives 20 percent of its total equity to its employees, said Anand Sanwal, CEO of a data firm.
The new tax provision alleviates the issue created in the changing investment dynamics of Silicon Valley. Currently, it takes companies on average 11 years to go public versus the average of four years during the dot-com era. With the substantial increase of the years employees’ wealth is restricted from their access, many have resorted to loans or even ditching their shares.
“Sometimes people don’t or can’t or won’t write that big of a check,” said Jason van den Brand, co-founder of a home refinance startup. “They’re like ‘This is going to cost me $50,000, where am I going to get that?’”