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Good news! Startup employees get a tax break. But let’s not pretend anyone at a startup takes a paycut anymore

By Sarah Lacy , written on September 23, 2016

From The Economics Desk

Yesterday, the House of Representatives passed the “Empowering Employees Through Stock Ownership Act.” It’s not quite as catchy as the JOBS act, is it?

The bill makes it easier for startup employees to exercise options because it allows them to defer income taxes on the stock for up to five years. It wasn’t particularly controversial. A Google search turned up only a handful of news stories about it, and-- truth be told-- I only saw it because of a back-patting statement from the NVCA.

“Most cash strapped startups dedicate their financial capital to developing and building new products and services, making stock options a critical tool to building strong teams,” said Bobby Franklin, President and CEO of NVCA.  “Talented startup recruits are happy to accept less in salary in exchange for stock options because they know that if the startup succeeds, everyone shares in the gains.  This is the secret sauce that underpins the innovation economy, aligning the interests of the startup founders, their investors and team members to drive value creation for the country.”

“Unfortunately, as the U.S. capital markets have become hostile to small capitalization companies, startups are now choosing to stay private longer rather than pursue an IPO.  This creates challenges for startup employees when their stock options vest without a liquid market to sell their stock to pay the taxes due,” added Franklin.  “With passage of this important legislation in the House today, lawmakers recognize how important stock options are to maintaining a strong entrepreneurial ecosystem and agree that startup employees shouldn’t be forced to pay taxes immediately on phantom income they haven’t received.  We are excited to see Congress take a step towards updating the tax code to reflect the realities of the entrepreneurial ecosystem.  We applaud Congressman Paulsen and Congressman Crowley for their leadership on this issue and thank Majority Leader McCarthy for spearheading the Innovation Initiative of which this bill is an important component.” 

Let me say right now: I don’t have any problem with this bill. All you have to do is look at the current refusal to go public and maximizing of “priced for perfection” valuations to know no one is prioritizing the rank and file startup employees right now.

But let’s be honest: The NVCA is kinda full of shit in this statement. At least by the standards of how things work in the Valley right now.

First off, while activist shareholders and post-dot-com-bust regulations have certainly made going public more difficult, it’s mostly entrepreneurs who have refused to file in order to maintain control and independence. (Much to the angst of their investors.)

But the bigger spin in this statement is the line about recruits “happily” accepting less money to go to startups. That has not been the case in the Valley for a long time. First off, these “startups” are cash rich, and pay employees market rate, if not over market rate.

Consider recent data from Paysa:

Software engineers across the nation make $104,000 a year on average, but for those working at the top tech companies in the world, that's just the start. New data released Tuesday shows that the average coder working for the likes of Apple, Amazon, Uber and others easily make more than $200,000 when salary, equity and bonuses are all added up.

At the top of the charts is Airbnb, which pays its average engineer a total compensation of $312,000 per year, according to a report by The Information. The figures in the report come from Paysa, a startup that collects compensation data. At Airbnb, more than half of a coder's pay comes in his or her equity in the company…

...Airbnb is the only firm that appears to be paying programmers more than $300,000 a year on average, but there are many others who exceed the $200,000 mark. They include Uber ($292,000), Twitter ($290,000), Facebook ($285,000), Snapchat ($252,000), Google ($233,000), Microsoft ($222,000), Apple ($208,000) and Amazon ($203,000).

A separate report released in late August by Hired shows that geographically the San Francisco Bay Area remains the region with the top salaries for software engineers. There, the average salary for an engineer is $136,000. That is followed by Seattle at $128,000 and Los Angeles, where coders get paid $124,000 annually on average. 

That’s right: Airbnb pays engineers three times the national average, nearly $100,000 more than the large companies like Microsoft, Apple, Amazon and Google listed.

And it’s not just engineers:

But while software engineers are getting well compensated, they are not the highest paid jobs in tech. On average, coders earn $123,000 a year, according to Hired. That trails the salaries of product managers and data scientists, who make $133,000 and $127,000, respectively. Behind software developers are designers, who make $115,000 on average. 

Let’s put to bed the myth that well funded Valley startups pay anyone less in exchange for options. Options are at best icing on the cake. The market is simply too competitive, thanks in part to companies like Facebook and LinkedIn refusing to take part in the Valley’s epic wage collusion pact, and whistleblowers’ willingness to expose it.

Too many engineers, managers, and executives have seen friends toil 24/7 and wind up with nothing. With plum jobs at companies valued at half a trillion dollars like Facebook, Apple, and Google the other alternative, they’re at least gonna afford San Francisco rents while they work that hard.