Startups and venture capitalists rarely get worked up over laws before they pass, but the tax plan currently winding its way through Congress is causing an uproar in Silicon Valley.

The Senate version of the bill requires employees pay tax on stock options at the time they vest, rather than when they are exercised. Stock options are a big part of compensation at startups, giving staff a shot at earning serious wealth should the startup succeed. With companies staying private longer, the proposed bill would force an increasing number of employees to pay tax before they even take ownership of shares.

“This would be a catastrophic blow to early stage companies,” said Michael Boswell, co-founder of health startup Cue. “This is like paying taxes on the winning of the lottery without knowing whether you're going to win.”

Fred Wilson, managing partner of Union Square Ventures
Fred Wilson, managing partner of Union Square Ventures Peter Foley/Bloomberg

The wording is likely to change as policymakers continue revising the tax plan this week, and members of the House of Representatives are working on a version that startups like. Still, Boswell and others in the startup world, including PayPal co-founder and venture investor Keith Rabois, are worried. BitTorrent creator Bram Cohen, former Facebook Inc. Chief Technology Officer Bret Taylor, and venture investor Fred Wilson also criticized the bill.

Wilson urged startup employees to contact their senators to tell them to remove the provision before it becomes law. If it remains, “it would be the end of equity compensation in startups as we know it,” he wrote on his blog.

Engine, a research and advocacy group supporting tech startups, collected more than 500 signatures for a letter it sent to Senator Orrin Hatch opposing the changes to the tax code.

Representatives from the National Venture Capital Association, an industry group, said they are also talking with lawmakers to try to persuade them to drop the provision. An NVCA spokesman said Senator Rob Portman has an amendment to strip out the language and the NVCA is "hopeful" it will get adopted during the next version of the bill.

Bloomberg News