Story originally published in Reno Gazette Journal
A major hurdle blocks Reno from realizing its potential as a tech hub. Legislation may soon be considered that could move the needle for Reno and startups everywhere.
As we abandon the good-old-boys past and flirt with a more sustainable future economy, we must shift from traditional pay structures and do as Silicon Valley does.
The solution to creating wealth is through shared equity. Stock options for employees entice top talent to commit to a company’s success. It is upon those successes true wealth is created. The employees reap benefits then reinvest in the community, launching new companies.
Luckily, we are not the first adopters of this idea. The success is proven through the likes of Google, Facebook and eBay to name a few.
The current structure is not conducive to growth. Bristlecone is fortunate to have backing to support unconventional pay structures, enabling us to attract and retain top talent which would normally be swept up by the region’s large corporations.
Reno’s startups have hacked their way to success using similar methods but we have a long way to go. To compete with other secondary markets like Austin and Denver, we inevitably need to attract outside talent also. We can attract outsiders with tax breaks until we are blue in the face but the issue goes beyond state lines.
Existing federal tax policies actually limit employees’ ability to cash in on their hard work. Currently, employees of any startup are required to pay taxes as soon as their stock options are exercised, even if those are privately held, or without a market for the sale of some shares to cover the taxes.
Say a programmer at Bristlecone gets 50,000 shares with her compensation package. That stock may increase by four dollars since her options were granted before we are public. The programmer may decide to exercise her shares but would quickly realize she owes almost $100,000 in taxes with no market in which to sell shares to cover costs. Unless this programmer has incredible wealth, it becomes impossible to exercise her options.
These prohibitive tax burdens make it harder for Reno startups to attract talent for a few reasons. First, if employees cannot exercise their options, the value and attraction of the stocks is diminished. Additionally, employees in competing markets cannot leave larger companies for startups in Reno because their net worth is tied up in options they cannot afford to exercise.
There is a legislative fix to solve this problem which entails allowing employees of private companies to defer taxes on equity until shares are sold. Then, employees are not burdened with taxes until the assets become liquid. The same tax is owed, just not until those stocks have a market for sale.
Nevada’s startup ecosystem has incredible potential. Our representatives must pursue policies to ensure we can continue attracting the best talent.