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Equity Compensation 101
By Gary T. Moyer, April 11, 2000
General Tax Rule
- General rule (IRC §83): an employee has income equal to the fair market value of property received from the Company (on a bargain-element basis) where (s)he receives it free of any substantial risk of forfeiture. The Company gets a deduction when the employee recognizes ordinary income.
- Example: The Company is worth $10 million in 2000. The sole shareholder and CEO promised his star marketing director 10% of the Company when he came on board in 1995 (when the Company was worth $2.5 million). After years of being hounded by the star, the CEO finds his stock certificate book and writes out and signs a stock certificate in the star’s name for shares representing 10% of the Company’s stock. Result: star has $1 million of wage income, the Company has a $1 million wage deduction.
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