Internal Revenue Code section 409A

And so today I want to talk about where the cap table market is heading.

what founders should actually look for when choosing a provider and why things like 409A valuations, real-time valuation, and private market liquidity are becoming increasingly connected.

So let's start with big picture for a second.

And we'll talk about, we'll get into these details, but how has the role of cap table platforms changed?

So that's what it includes.

And as you grow, there is not a catch to it.

Like our second tier, it's 990, it covers 409A and a cup table.

So we give a cup table for free, but again, we feel very strong is the valuation.

By October 2006, fifty-four companies faced potential NASDAQ delisting for late financial filings, and in January 2007, the SEC Division of Corporation Finance issued a sample comment letter on restated financial statements involving option grant errors.

What tax rules did backdated options violate? Backdated options with an exercise price below fair market value on the grant date failed three Internal Revenue Code requirements: the performance-based exception in Section 162, the exercise price test for incentive stock options in Section 422b4, and the discounted option rules of Section 409A.

Section 162 enacted in the Omnibus Budget Reconciliation Act of 1993 caps the corporate deduction for covered executive pay at $1 million per year and exempts performance-based pay.

The IRS Chief Counsel concluded in memorandum AM 2009006 that discounted options cannot qualify as performance-based pay under Section 162(m)(4)(C), even if the exercise price is later raised.

The Chief Counsel treated backdated options intended as incentive stock options as non-statutory options under Section Eighty-three, so the employee recognizes ordinary income on the spread at exercise.

Section 422c(1) forgives a pricing failure only when it resulted from an attempt made in good faith to meet the price requirement, which leaves a grant dated to a known lower price outside its terms.

Section 409A, added by the American Jobs Creation Act of 2004 for amounts deferred after December 31, 2004, reaches options with below-market exercise prices and adds a twenty percent additional tax.

The IRS offered transition relief through 2008 for canceling and reissuing discounted options and excluded officers and directors subject to Section sixteen of the Exchange Act.

It's helping W-2 executives understand that corporations can set up all different types of vehicles very similar to what they're currently using.

The world that we operate in is the non-qualified planning space, so everything in under 409A, which is pretty much excess of your typical retirement plans, which is 401k, SEPs, Simple, IRAs, things that people are commonly putting money into.

What these W-2 employees can do is if you enter a certain level of income within an organization, you can actually continue to put more money away into what's called...

A great example would be a deferred comp plan.

So a deferred comp plan is kind of an excess vehicle that allows a W-2 executive to continue to put money away on a pre-tax basis and then take money on an after-tax basis.

And it's really easy to understand that if you take a dollar and you invest it pre-tax versus investing a dollar post-tax, often with the folks that we work with who are paying, you know, anywhere from forty to fifty cents on a dollar, how much of an impact that can make on building wealth over time.

So that's one of the primary things we do, and I'd say we operate in the entire 409A planning space, but it's about understanding that if you are a W-2 executive, there are plenty of things that you can do.

You just have to start that conversation with your executive team, your CFO, your CEO, and understand how that kind of works and work with folks like myself to begin those conversations.