Unissued Startup Equity: Navigating 409A, Deferred Compensation Issues, Tax Issues, and Cleanup Measures

Unissued startup equity can present several pitfalls for companies during fundraising, employee recruitment and retention, and potential exit events. Employee benefits and tax counsel must be aware of complexities stemming from certain tax rules, valuation issues, and other key items impacting the allocation of shares and compensation arrangements.

Unissued equity are shares that a startup is legally permitted to issue but hasn't yet distributed to shareholders or employees. These shares are typically used for future capital raising, employee incentive programs, or mergers and acquisitions. However, in the context of equity compensation and the tax regulations governing it, utilizing unissued equity for stock option grants must be carefully structured. If an equity award violates Section 409A, the award may be immediately taxable.

Listen as our panel discusses key issues with unissued startup equity and implications stemming from Section 409A, other tax rules, and deferred compensation arrangements.