The following is not meant to be legal advice.
Highlights of the Internal Revenue Service (IRS) issued Final Regulations on April 10, 2007 governing deferred compensation plans under Code Section 409A (“409A”) include:
The Final Regulations expand the ability to extend the exercise period of a stock option following termination of employment.
For public companies, the Final Regulations enhance the ability to pay severance to certain key employees within the six-month period after termination. Public companies will need to identify specified employees in advance in order to comply with requirements.
Discount stock options are subject to Section 409A because the price is not equal to the FMV on the date of grant. This is different from ISOs and Nonqualified stock options granted with a FMV exercise price, which is generally not subject to Section 409A.
For private companies, they may have issue with valuation for any reasonable valuation method may be used to determine the FMV of the stock but use of certain methods create a presumption of reasonableness. A written report by someone needs to be by someone with knowledge in doing valuations, and a type of report that a reasonable person would rely on. The person conducting the report should have 5 years of experience in the industry. For private companies, the report cannot be relied on if in 3 months of the report, a company plans to have a change of control, or in 6 months, the company plans a IPO. For venture funding, the company is better off getting an independent appraisal because venture capitalists do not like the liability of wrong price determinations.
The Final Regulations are effective as of
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