New tax rules may alter the way Colorado startup companies think about distributing equity to employees. If a startup offers stock options to at least 80 percent of its workforce, it may be possible to ease the tax consequence that come with them. In most cases, stock options must be exercised within 10 years. However, if an employee leaves the startup, those options may need to be exercised within three months.
The average startup will take 11 years to go public. Therefore, it may not always be possible for employees to sell shares to raise needed funds to pay a tax bill. Under the new tax law, some employees will have the ability to defer those taxes for up to five years. When the options are exercised, they are treated as ordinary income. Those who joined a successful company early in its existence could see tax bills in the hundreds of thousands of dollars.
Those who cannot pay the tax bill may either give up their shares or take out loans to cover what they owe. Currently, about 20 percent of equity in companies backed by venture capital is earmarked for employees. This number may go up or change in other ways as startups try to take advantage of tax rules related to employee stock options.
Founders of startup companies may benefit from talking with a business law attorney. Doing so may help the owner of a startup company learn more about stock options and crafting option agreements with employees. It may also be possible to learn about how they are taxed, which may be helpful when it comes time to put together compensation packages for executives and other key employees.