A proposed wealth tax in California is causing significant unease in Silicon Valley, prompting concerns that extend far beyond the state's existing 5% tax rate. The nervousness stems from the potential impact on founders who hold substantial voting power through dual-class stock structures, even if their actual equity ownership is considerably smaller.

The proposed tax would target founders based on their voting shares rather than their actual equity. For example, Larry Page, despite owning approximately 3% of Google, controls roughly 30% of its voting power. Under the proposed law, he would be taxed on that 30% stake. For a company with a valuation in the hundreds of billions, this translates to a substantial tax burden. One SpaceX alumni founder, now building grid technology, reportedly faces a tax bill at the Series B stage that would effectively eliminate his entire holdings.

This potential tax burden could have a chilling effect on innovation and investment in California. Founders might be incentivized to relocate their companies and personal wealth to states with more favorable tax policies. This exodus could diminish California's dominance in the tech industry, potentially impacting job creation and economic growth within the state.

Dual-class stock structures are common in the tech industry, allowing founders to maintain control over their companies even as they raise capital. While these structures have been praised for enabling long-term vision and protecting companies from short-term market pressures, they also concentrate power in the hands of a few individuals. The proposed wealth tax highlights the potential financial implications of these structures.

David Gamage, a University of Missouri law professor who helped craft the proposal, believes Silicon Valley's reaction is an overreaction. He suggests founders could utilize deferral accounts for assets they don't want taxed immediately, with California instead taking 5% whenever those shares are eventually exchanged. However, the long-term implications of such deferral strategies and their potential impact on investment decisions remain unclear. The future hinges on whether California lawmakers address these concerns and whether Silicon Valley's leadership believes a compromise is possible.