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03/28/2016

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More excellent stuff, Dan. One observation and one question.

(I realize this is getting deeply into the weeds, but nevertheless...) 83-b elections may make a great deal of sense when the value of what you are getting is nominal and/or equal to FMV. But if you are getting something valuable you will have an immediate tax liability, and if the company subsequently fails or you forfeit your award, you will not be able to recover the taxes you have paid.

I'm not sure what you mean by "Equity that can be transacted by an individual, then cancelled or purchased back with no additional consideration to the individual." Could you elaborate just a bit?


Tony,

Thanks for the contribution.

83(b) elections can be very risky, especially, as you say, when there is real taxable value at the time of election. This is something that each individual must look into in detail before making an election.

The concept of "Equity that can be transacted by an individual, then cancelled or purchased back with no additional consideration to the individual." is not common, but can and does happen (sometimes purposefully, sometimes inadvertently.)

This has been something that a few PE firms pushed in the past. The equity plan allows for the individual to exercise their stock option (or receive shares from the vesting of an RSU). The individual has to pay any exercise cost and make sure taxes are paid on that value. But, at a point in the future, the company has the right to "buy back" the shares at the price paid (not the current value).

While this is how commonly how repurchase features work when the shares are still unvested (and therefore may not yet have been taxed and are still "subject to a substantial risk of forfeiture") it has also been attached to VESTED shares. Skype was probably the most visible culprit of this approach (http://techcrunch.com/2011/06/26/skypes-worthless-employee-stock-option-plan-heres-why-they-did-it/) but others have done similar things.

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