409A

Section 409A of the Internal Revenue Code is a complex and often counterintuitive set of tax rules applicable to deferred compensation. Deferred compensation exists when an employee, consultant or board member has a contractual right to compensation that may be paid in later taxable years and includes many arrangements not typically thought of as deferred compensation (e.g., severance benefits, options and other equity awards). If deferred compensation arrangements are not exempt or compliant with Section 409A, there are draconian adverse tax consequences, even if the non-compliance is unintended. For that reason, most private companies obtain regular independent third party valuations of their stock, commonly referred to as a “Section 409A valuations,” to ensure that their option grants are exempt from application of Section 409A.