Empowering Employees through Stock Ownership Act ... For private companies, there is no liquid market for the shares, so
Empowering Employees through Stock Ownership Act The Problem: The tax code makes it very costly for employees of private companies to exercise options. ● Under current law, employees who exercise stock options are required to pay an immediate tax on the difference between the fair market value of the underlying stock and the amount paid for the stock. ● If a company’s value has increased since the options were first issued, employees may be on the hook for a significant tax payment upon exercise. ● For private companies, there is no liquid market for the shares, so employees can’t sell some of the underlying shares to pay the tax. Thus, if an employee does not have significant cash on hand to pay the tax, he or she cannot exercise the options. ● This leads to several problems for the startup/private company community: ○ The high cost of exercising options makes it more difficult for startups to attract talent when competing with larger incumbents that can offer higher salaries and benefits. ○ Employees at larger private tech companies that have received a bulk of their compensation in the form of options that they cannot exercise will be unable to afford to leave their current employer to join or found a startup. ○ Only wealthy employees can afford to exercise, boxing out the employees that would most benefit from participating in the upside of the company and and making the startup world inaccessible to those without significant personal assets. ○ Options expire if not exercised 10years after the grant date. The Solution: The Empowering Employees through Stock Ownership Act allows employees of private companies to defer taxes on options until shares are sold. ● Under the proposed legislation, employees would still incur the same income tax liability when exercising options or upon vesting Restricted Stock Units (RSUs); however, they would be allowed to defer paying those taxes for up to 7 years, or until they sell the underlying shares. ● Employers would defer taking the corresponding tax deduction until the year the employee pays the tax. ● Employees would still be liable for social security tax and Medicare tax at the time of exercise. The Message to Policymakers: This bill will help regular employees and not large owners and senior executives. ● This proposal is about helping regular employees who, under current law, often cannot afford to exercise their options. This proposal is designed to promote employee ownership. ● To ensure that the proposal helps employees rather than wellpaid executives, the tax deferral is limited to: ○ Companies that grant options to 80% or more of its employees. ○ Employees who own less than 1% of the company’s outstanding shares.
