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Equity Compensation 101
By Gary T. Moyer, April 11, 2000
Recapitalization - Tax Result
- Targeted Tax Result: Neither Mr. Smith nor Star recognizes taxable income as a result of the recapitalization. The preferred stock has a value of $10 million, and the common stock has a value of $0 and therefore Star received something worth $0 (albeit free of any substantial risk of forfeiture).
- If the Company liquidated immediately after the recapitalization, the preferred stock would get the entire $10 million value of the Company and the holders of the common stock would get $0. Therefore the common stock is worth $0 and Star has no taxable income as a result of his receipt of that common stock.
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