Startup Section 409a stock options Lawyer » What is Section 409A? Section 409A of the Internal Revenue Code. Section 409A was added to the Internal Revenue Code in October 2004 by the American Jobs Creation Act.
In addition, such deferred amounts are subject to an additional 20 percent federal income tax, interest, and penalties. Certain states also have adopted similar tax provisions. For example, California imposes an additional 20 percent state tax, interest, and penalties. Under Section 409A, a stock option having an exercise price less than the fair market value of the common stock determined as of the option grant date constitutes a deferred compensation arrangement. This typically will result in adverse tax consequences for the option recipient and a tax withholding responsibility for the company.
The company is required to withhold applicable income and employment taxes at the time of option vesting, and possibly additional amounts as the underlying stock value increases over time. How do you set the exercise price of stock options to avoid Section 409A issues? Below are links to all of WSGR’s client alerts on 409A. We are struggling with this right now with. Suppose deferred compensation comes in the form of convertible notes, convertible into a series B preferred stock to be issued.