The following is not meant to be legal advice.
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Section 409A was enacted in October 2004 as part of the American Jobs Creation Act. Under Section 409A, amounts deferred under a non-qualified deferred compensation plan, including severance arrangements, are includable in gross income unless the amounts are subject to a substantial risk of forfeiture. Such deferred amounts are subject to an additional 20 percent federal income tax.
Under the final regulations, service recipient stock includes any class of common stock within the meaning of Section 305 of the Internal Revenue Code. This includes a class of common stock that has liquidation preferences. Service recipient stock may also include stock of any corporation in a chain of organizations that have a controlling interest in another organization under Section 414 of the Internal Revenue Code.
The final regulations provide that a separation from service for good reason may be treated as an involuntary separation of service in circumstances, and therefore may not be subject to the penalties of Section 409A.
The final regulations provide that the extension of a stock right's exercise period generally will not be treated as an additional deferral feature or a modification of the stock right for purposes of Section 409A if the exercise period is not extended beyond the original maximum term of the stock right, but no longer than 10 years from the original grant date of the stock right.
A start-up private company can rely on the written report presumption with a reduction to 90 days for a change in control and to 180 days for an initial public offering. A valuation of stock based upon a reasonable application of a reasonable valuation method is treated as reflecting the fair market value of the stock. 
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