Equity incentive awards such as stock options and restricted stock awards 1 provide a key tool for Founders and early-stage companies to attract, retain, and incentivize key employees and other service providers of the Company.
The basic tax rules state that when an employer gives an employee something of value, the value of the item given to the employee is taxable as ordinary income to the employee.
With respect to grants of equity to employees, Section 422 of the Internal Revenue Code creates an exception to this general rule.
The grant of equity by the Company to an employee may create a taxable event to the individual receiving the equity grant.
To comply with IRS regulations and achieve maximum tax benefits for recipients, equity incentive awards must be issued by the Company at fair market value (FMV).
Applicable IRS regulations (§ 26 CFR 1.409A-1(iv)) provide a process for determining the FMV of stock issued in connection with option awards. The regulations generally require that FMV be “determined by the reasonable application of a reasonable valuation method.” Determining the fair market value of a share and stock requires careful planning.
The information provided in this article does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available in this article are for general informational purposes only. Information in this article may not constitute the most up-to-date legal or other information. Readers of this article should contact their attorney to obtain advice with respect to any particular legal matter. No reader, user, or browser of this article should act or refrain from acting on the basis of information in this article without first seeking legal advice from counsel in the relevant jurisdiction. Only your individual attorney can provide assurances that the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation. Use of, and access to, this article or any of the resources contained herein do not create an attorney-client relationship between the reader, user, or browser and the author or The Mitchell Law Firm, A Professional Corporation. All liability with respect to actions taken or not taken based on the contents of this article are hereby expressly disclaimed. The content on this posting is provided “as is” and no representations are made that the content is error-free.