Stock option plans and other forms of equity-based compensation allow startups and emerging growth companies to incentivize employees to continue working with the company to achieve certain milestones. These forms of compensation often trigger complex tax issues. The consequences of noncompliance with the tax code in structuring these compensation plans can undermine the intended benefit of the equity award. For example, when an employee is granted a stock option it can be taxed at the capital gains rate if it is held for the required holding period but these options are sometimes exercised early and result in the stock option being taxed at a higher rate. Further, a defective equity award may result in an additional twenty percent penalty tax and interest payments.

The following is a list of four common questions we receive from clients in connection with structuring equity compensation arrangements.

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