Take a Bow For the New Revolution, and don’t let the same tax mistakes fool you again

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by John Ludlum

As we enjoy the Silicon Slopes Tech Summit 2020, it has been great to catch up with executives, investors, and entrepreneurs working to build the next technology ideas into successful companies.  It is interesting to think that we don’t quantify the economic benefits that one great company, which brings together a talented team of founders and executives, finds a successful exit, and then comes back together to do it again at another company, has on an area.  There are many legendary technology companies that have had this effect, creating places like Silicon Valley and other areas in the country known for incubating technology companies and ideas.

One great thing about knowing and working with the seasoned investors and entrepreneurs is their ability to help the new generation see how to solve problems that these companies encounter, and how to avoid the mistakes that some people have made.  In my small part of this world, the conversations in 2001-2002 with employees and executives who were too optimistic in the first internet bubble will never be forgotten.  Yes, you can exercise equity awards like an incentive stock option (ISO) with a promissory note, second mortgage, or personal bank loan, and if the stock price goes up from there and the company achieves liquidity in an IPO or acquisition, you could win big with large gains all taxed at the long-term capital gains rate.  I know a number of people who had this great outcome.  However, the other side is that if the price does not go up, or if the company does not achieve liquidity, then there can be tax problems.  Exercising an ISO will result in an alternative minimum tax (AMT) adjustment in the year of exercise for the spread on the date of exercise.  If an optionee is subject to the AMT, then this tax is due to the IRS based on the value at the date of exercise.  There is no consideration for the fact that the shares are not liquid and have not been sold at the time of or at the value of the corresponding tax obligation, meaning the optionee is gambling that the value the shares will continue to go up and that there will be liquidity.

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[Don’t] Tell Me Lies, Tell Me Sweet Little Lies … or the SEC will charge you with fraud

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by John Ludlum

Many private companies assume that if valid federal and state exemptions from registration are available for private company securities that there is little risk of problems with the Securities Exchange Commission (SEC).  While it is rare for the SEC to take an interest in private company transactions, many SEC Rules apply to private company securities and transactions.

In one example, Stiefel Labs (Company) maintained an Employee Stock Bonus Plan (Plan) with Company contributions funded, at least in part, by shares of Company stock.  As a private company, repurchases by the Company were the only way for employees to receive liquid funds for their shares.  The Company engaged independent accountants to perform fiscal year end valuations and made this valuation information available to Plan participants and used this value for repurchases for the next year. 

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Sitting On a Dock of the Bay, watching my post-termination exercise period, roll away

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Tax considerations for modifying stock options to extend the post-termination exercise period

by John Ludlum

We are often asked by our private company clients about making changes to outstanding stock options.  In some cases, changes to the number of shares subject to an option are needed, or to the vesting schedule, or to the allowed payment forms for exercising the option.  The rules affecting these decisions come from several, primarily tax, authorities, and the implications to the option and the company are quite varied depending on the change being made. 

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Walk this way…to avoid the pitfalls of ERISA

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by John Ludlum

Companies implement bonus plans to meet a variety of business objectives:  retention, specific company business goals, change of control, and others.  In designing bonus plans, there are a variety of legal fields that must be understood for exemption or compliance including securities, tax, ERISA, and employment.  Many times, bonus plans that pay only in cash for achieving specific corporate objectives and which require services through the date of payment are exempt from onerous compliance mandates; however, if a bonus plan is found to provide retirement income or “results in a deferral of income by employees for periods extending to the termination of covered employment or beyond,” then that arrangement may be found to be a “pension plan” under ERISA Section 3(2) (29 U.S.C. § 1002(2)(A)).  Once a bonus plan is subject to ERISA, it must comply with ERISA’s annual reporting, participant communications, funding, participation, vesting, and fiduciary duty requirements. 

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She works hard for the money, so you’d better … help her afford to buy company stock

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by Beth Nedrow and Kevin Selzer

Employee Stock Purchase Plans (ESPPs) are a program offered by many companies (particularly those with publicly traded stock) as a way for all of their employees to buy company stock. In their most robust format, employees can buy stock at a discount. You’d think employees would jump at the chance to capitalize on this immediate value opportunity. Not so! Employee participation rates are typically fairly low (often below 50%). Employers who offer ESPPs strive for ways to engage employees to appreciate and participate in this valuable benefit. Those employers may be interested to hear that a startup company is making headlines for its product aimed at boosting ESPP participation.

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