Case Study: Equity Compensation Plan

Our Executive Retention & Retirement Solutions team was engaged by a company that maintained an equity compensation plan that provided for grants of nonqualified options to purchase restricted non-voting Class A units in the company. The purpose of the plan was to provide designated employees with an incentive to perform services for the company over a specified number of years. The Board of Directors of the company determined the fair market value of the Class A units based upon an independent third party appraisal of the value of the underlying stock of the company. The purchase price of Class A units subject to an option was determined by the Board of Directors and could never be less than the fair market value of the Class A units on the date the option was granted. A grantee was encouraged to execute a section 83(b) election within 30 days of the date of the grant. The payment of the benefit amount upon the exercise of the option was scheduled to occur over a four-year period, 25% of the amount each year. Because the plan included a deferral feature that is not permitted under section 409A of the Internal Revenue Code, the plan failed to comply with the equity compensation exception under section 409A and, therefore, was a deferred compensation plan subject to section 409A.