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05/11/2017

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Great reminder, Dan. Thanks for the post. I'd love to see how you might use a variant of an ESPP, or some other vehicle, to garner similar benefits for privately held companies- especially those with no intention of going public.

Thanks for the comment Brett. ESPPs at private companies are far more difficult when designed in a payroll deduction model.

There are a few ways (if you are careful) to create similar offerings or offerings with potentially similar benefits.

1) Create an "incentive pool" for each individual that is based on a percentage of their pay. Allow individuals to exchange "incentive dollars" for cash at a 1:1 value ratio and for RSUs at a discount value ratio. The RSUs can settle in stock, or cash (most likely cash for companies that intend to stay private). This type of plan would cost more for the company and have less tax advantage for the individual, but would give a similar opportunity

2) Consider granting stock options under IRC 423. This is the actual intent of that section of the code. You can grant a stock option with a 5 year life that offers a 15% discount from the value on the purchase date. If a company offered a 2 year life this may be a way to create ownership for those who want it.

3) There are many creative ways to use synthetic equity, like SARs. None will offer the great income/tax benefits of an IRC 423 ESPP, but they can be structured to match a private companies goals more effectively.

Private company equity is a different world. There are some real restrictions, but also some fantastic benefits when designing a plan for a company that has no intent of an impending IPO. I do a lot of work for companies like this and there are few times when two companies end up with the same program.

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