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SALT LAKE CITY — Davis Smith could hardly believe what he was reading. As CEO of local startup Cotopaxi, the Senate’s tax reform bill had caught him off guard.
While President Trump and the GOP had touted the bill as an effort to cut taxes and simplify the tax code, one of the plan’s provisions seemed absolutely catastrophic for growing businesses.
Startups will often offer employees stock options when joining a company, mainly as an incentive for joining what may be a risky venture. The provision, however, proposed taxing those stock options during the vesting, or maturation, period.
Stock options and equity usually mature over a certain number of years, but employees aren’t actually receiving any cash or value from those shares while the equity is vesting. They only see financial reward if the company sells or they cash in.
“What they were proposing was taxing people for something that wasn’t even taxable,” Smith said.
Employees who owned stock options would owe the government tax dollars for equity that had vested, even though they hadn’t yet seen any financial gain from those shares, effectively robbing startups of a major incentive.
“As a startup, one of the ways we’re able to compete against other companies is by giving people part of the upside,” Smith said. “You’re riskier than maybe a bigger business. Maybe you can’t pay the same kind of compensation as a bigger business. But the way you can make up for that is by giving people ownership."
Once the bill was released, businesses, entrepreneurs and venture capitalists across the country began calling out the provision, deeming it the “killer” of startups. Wednesday morning, Senator Orrin Hatch, head of the Senate Finance Committee, announced the removal of the provision.
“Senator Hatch is working hard to advance Utah priorities and strike the best possible balance to deliver tax relief and boost the economy,” Hatch spokesman Matt Whitlock told KSL. “Removing that provision made the most sense to ensure the tax reform proposal would help the economy in Utah and around the country.”
And the removal of the provision comes as a relief to the entrepreneurial community, and Utah’s in particular. The local startup community is really what’s been driving a large part of Utah’s economy over the last decade, Smith said.
“The Utah Technology Council is very appreciative that Senator Hatch listened to concerns of the tech community and removed the provision in the bill that would restrict growth and reduce competition in the marketplace,” UTC CEO John Knotwell told KSL.
