Updated

Silicon Valley and other U.S. startup hubs are outraged at a provision in the newly revealed Republican tax plan that some tech leaders say could have a devastating impact on the way startups are funded.

Under the new plan, the Senate would place a tax on stock options at the time when they are vested rather than when the shares themselves are exercised. That means that people who own stock options would have to pay taxes on them each whenever they vest even a small amount each month, even though they would not actually be able to use the money from those options.

“You can’t spend it, you can’t save it, you can’t invest it. Because you don’t have it yet,” Fred Wilson, a partner at Union Square Ventures, wrote Monday in a blog post criticizing the plan. “Taxing equity compensation upon vesting makes no sense.”

Updated: The provision of the tax bill at issue was removed from the bill two days after this story was posted.

The tax would be a major problem for startups and other new businesses, many of which use stock options to partially pay employees that they would otherwise be unable to afford. Wilson and many startups have argued that the tax plan would make it much harder for startups to recruit talent.

Wilson also noted that many employees leave before their options are actually vested, and he said that this “should be a clear enough example to the lawmakers that vesting should not be a taxable event.” He called on startup employees and other people paid with stock options to contact the Senate about their concerns. Wilson added that under the new plan, “we will see equity compensation replaced with cash compensation and the ability to share in the wealth creation at your employer will be taken away.”

Although the tax plan has many startups and entrepreneurs worried about their future, others believe that there is no way that the tax plan will make it through the Senate unchanged. Justin Field, vice president of government affairs at National Venture Capital Association, told Wired that most likely the drafters of the tax plan did not recognize the consequences of the stock options tax. “It’s a simple matter of not understanding the consequences,” he said. “It’s a pure oversight that they didn’t realize the impact this would have on entrepreneurship.”

The Senate hopes to approve the new tax plan by the end of the year, and the tax provision could be considered as early as today.

Photo: Geoff Livingston The Dark Capitol via photopin (license)