California’s proposed wealth tax is stirring significant unrest in Silicon Valley, and it’s not just the idea of a 5% tax that’s causing the uproar; rather, it’s what’s hidden in the details.
The so-called “billionaire tax” aims to treat voting stock as if it signifies actual ownership, meaning that founders would be taxed based on their control of the company, not just the wealth they possess. This could be quite detrimental for innovators who want to retain control as they launch new startups.
“It’s not clear whether this was a deliberate choice,” said Jared Walczak, a tax specialist at the Tax Foundation. “Even if it wasn’t intended, the potential consequences could be significant.”
This problem touches all tech founders who control their companies through dual-class stock structures. Notably, it’s part of the reason Google’s co-founders, Larry Page and Sergey Brin, distanced themselves from the company in 2019.
For instance, Page owns roughly 3% of Google’s stock but maintains about 30% of the voting rights. Under the proposed legislation, he would face taxes on 30% of the company’s value he controls, rather than the much smaller actual ownership percentage.
Startups would find calculating tax responsibility to be both costly and complicated. According to Walczak, “Valuing non-public startups is notoriously tough. Different valuations can arise not from any wrongdoing but due to the intricate nature of the process.”
When states struggle over how to assign value to a business, the ramifications could fall not only on the company but also on the individual responsible for calculating the value, leading to potential penalties.
Joe Malkow, a partner at a Bay Area venture capital firm, emphasizes how deeply damaging this tax could be for emerging founders tackling significant issues like energy poverty within California.
“Just last week, we founded a company of SpaceX veterans focused on developing powerful technology to help California’s strained power grid,” Malkow mentioned. “We made sure to give founder shares 10 votes each, recognizing the importance of building solutions that benefit many, even if they threaten the interests of a few.”
The founder’s control comprises 30% of a billion-dollar company. This implies he would face tax liabilities on vast amounts of phantom wealth, despite owning a much smaller share and having sold nothing.
“If this founder reaches a Series B funding round, the tax could obliterate his entire holding,” Malkow pointed out. “It’s akin to how homeowners had to hand over keys during the 2008 crisis and just walk away.”
Garry Tan, head of Y Combinator, shared that both Larry and Sergey expressed their inability to remain in California due to the proposed tax potentially seizing 50% of their Alphabet stock. He criticized the proposal as “ill-defined and detrimental to innovation in California.”
Although the tax vote isn’t scheduled until November, the legislation would apply retroactively from January 1, 2026, prompting some major figures to leave early and discouraging new startups. Since the start of the year, an estimated $1 trillion has departed the state, with reports indicating that both Page and Brin have relocated.
There are founders who haven’t openly opposed the tax—NVIDIA’s Jensen Huang stated he would be “absolutely fine” if it passed—but figures like Governor Gavin Newsom, typically aligned with progressive causes, have pledged to oppose it.
Walczak summarized the sentiment, stating, “Founders place a high value on maintaining control over their enterprises, often even more than their wealth. The notion that the state aims to target both? It’s hard to conceive a stronger motivator for them to leave.”
