House Majority Leader Kevin McCarthy (R-CA) and U.S. Rep. Erik Paulsen (R-MN) highlighted legislation on Friday that would encourage employee ownership of startup companies in a joint op-ed.
The Empowering Employees through Stock Ownership Act, H.R. 5719, which was recently approved by the House of Representatives, would allow employees to defer tax payments on stock offerings and equity stakes in companies to encourage employees to take advantage of such offerings.
McCarthy and Paulsen wrote in a recent op-ed in the Mercury News that startups often do not have the resources to compete with well-established companies in attracting talent, but the prospect of partial ownership can help startups remain competitive.
“At many startups across the country, stock options make up a significant portion of employees’ compensation while offering employees a greater stake in a project they truly believe in,” McCarthy and Paulsen wrote. “It remains the case, though, that more and more startup employees aren’t exercising these stock options because if they do, they are required to immediately pay taxes on the income associated with the stock, even though they may not have the available cash to do so.”
The current system creates a “lose-lose” scenario in which startups struggle to attract employees, and employees can’t afford to take advantage of promising investments in new companies, the lawmakers wrote.
“This legislation allows employees who own less than 1 percent of the stock of a privately held company that offers stock options to at least 80 percent of its employees to defer tax payments for seven years or until they are actually able to sell their stock, whichever comes first,” McCarthy and Paulsen wrote. “We should enable startups to use the best methods possible to attract employees and allow those employees to own part of the company they work for. Not only will this unite workers and business owners alike in pursuit of a common goal, it will also enable startups to attract and hire and retain the employees they need to try to become successful and shape the world. That means more innovation, new products, new services, more jobs, and more economic growth.”