Augusta Free Press

Bill encourages stock options for employees of startups, privately-held firms

U.S. Sens. Mark R. Warner (D-VA) and Dean Heller (R-NV), members of the Senate Finance Committee, along with Reps. Erik Paulsen (R-MN) and Joseph Crowley (D-NY), members of the House Ways and Means Committee, reintroduced bipartisan and bicameral legislation that would make it easier for startups and businesses to give employees an ownership stake in their company’s success by awarding stock options. Similar legislation was previously introduced in the 114th Congress.

Stock options, which are a right to purchase shares of a company at a future time at a fixed price, are an important tool for investing in and rewarding employees and increasing their compensation, but the tax implications often make this impractical for many employees of non-public firms. The Empowering Employees through Stock Ownership Act (EESO) promotes broad-based employee ownership by reducing this barrier to participation, giving employees new flexibility in handling their tax obligations for up to seven years after exercising their stock options. In order to be eligible, stock options must be extended to 80 percent of the workforce, and majority owners, corporate officers, and the highest-paid executives will not be eligible for the seven-year tax deferment.

“Giving more employees an opportunity to own a stake in their company can have a profoundly positive impact on workplace culture and productivity. Stock options can help rank-and-file workers share in their company’s success, and also offer cash-poor start-ups an important tool for recruiting and retaining top talent,” said Sen. Warner. “This bill encourages start-ups and businesses to expand employee stock programs beyond top management and across a broader universe of workers, which will help create new incentives and economic opportunities for businesses and their employees, too.”

“Employee ownership is a powerful tool that not only provides greater economic opportunity for employees, but increases employee engagement, motivation, and drives economic growth across Nevada and this country,” said Sen. Heller. “Our legislation makes it easier for startups and small businesses to award stock to their employees, which will ultimately help them retain and attract talent and fuel entrepreneurship.”

“American startup companies are the birthplaces of many breakthrough, forward-thinking ideas and technologies, and we need to ensure they are attractive places to work for top talent,” said. Rep. Paulsen. “This commonsense proposal empowers employees of these companies to have more ownership stake in their ventures, and further encourages innovation and entrepreneurship.”

“This commonsense bill gives American workers the opportunity to share in the success of companies they help build,” said Chairman of the Democratic Caucus Joe Crowley. “These are the types of workplace environments that should be fostered – ones where workers are engrained into the fabric of the company, have an economic stake in its success, and see their compensation increase as the company succeeds.”

Under current law, employees are required to pay taxes when they exercise their options or when their Restricted Stock Units (RSUs) vest. In other words, to access their employee ownership stake, employees are required to pay taxes on the excess of the fair market value of the stock – the difference between the amountpaid and the fair market value – and the employer receives a tax deduction on the date the employee exercises the option.

For companies that are publicly traded, employees can sell all or a portion of their shares on the public market to pay for their taxes, but in the case of privately held companies, there is generally not a market for employees to liquidate shares to cover their tax liability, and as a result, many employees are unable to exercise their stock options, missing out on the opportunity to gain wealth as their company succeeds.

“Stock options are a critical tool for startups to attract, retain, and incentivize top talent, but the existing tax regime around stock option compensation makes it unnecessarily difficult for employees to realize the value of their equity. The Empowering Employees through Stock Ownership Act will allow more employees to obtain a stake in the companies that they help to build and grow,” said Evan Engstrom, Executive Director at Engine. “This policy change is a no-brainer and a win-win for both startups and their employees.”

In addition, the legislation has the support of nearly 70 companies. A full list can be found here.

The Empowering Employees through Stock Ownership Act will:

For more information on this bill, click here. A copy of the bill text is available here.