What’s a Fair 409A Discount?
Quick note: I’m not your lawyer. I’m not giving legal advice in this post. Back in the olden days of venture capital, company boards had wide discretion in pricing company options. As is true today, there was a requirement that options be priced at or above the “fair market value” of the underlying stock (otherwise there would be tax consequences to the optionee and sometimes to the company as well). However the board could determine what that fair market value was and, generally speaking, there wasn’t a practical way that these valuations could be challenged. Most boards did some level of work to determine the FMV of a company’s stock but generally options were priced between 10% and 15% of a company’s then preferred price (because common equity sits behind preferred equity there is typically a discount applied to the FMV of common stock to account for this “overhang”). It was and is imprecise science but – at least in the case of venture backed startups – there wasn’t much harm in an option being priced low. It was a benefit to employees and a slight value transfer from equity holders to option holders (generally speaking in M&A transactions the value of the aggregate option exercise ends up allocated across the rest of the cap table). In a funny way it also benefitted the IRS in terms of tax collections as employees were taxed on the spread between the option and the value of the stock on exit and since these shares were typically exercised at the time of an exit were subject to short term capital gains. Higher strike prices distributes proceeds away from short term gain tax to equity holders who more typically are paying long term gains on the value that was shifted (I’m skipping a huge amount of nuance and detail here but the above is a general representation of how things work). …
August 15, 2018· 4 min read
Oppose HB 1192 – The “Software Tax”
My longtime friend Marion Jenkins, CEO of IT consultant QSE Technologies wrote what I think is one of the most eloquent and well thought out rebuttals to the proposed Colorado “Software Tax” (HB 1192). With his permission I’m posting it here in its entirety. If you feel the way I do about this issue, I urge you to take a stand on this issue. I urge you to oppose HB 1192, the so-called “Software” Tax. It is bad legislation and it will add significantly to non-productive administrative and legal overhead and kill productivity within the technology sector in Colorado (including not only technology-related businesses, but virtually every business – and every consumer – who uses technology). It will also lead to a mass exodus of key jobs and technology talent from Colorado, and it runs counter to many Federal initiatives aimed at creating jobs, improving job skills and implementing automation and efficiency to help the country get out of this recession. It will also lead to a massive expansion of government, whose only function will be to try to interpret and unravel an impossibly complex set of new tax rules. Those new government jobs will not provide any benefits to citizens, and particularly not provide any benefits directly to underserved populations, they will consist of auditors, analysts, enforcers and the like. …
February 1, 2010· 14 min read
Colorado House Bill 1192 Is a BAD Idea
In times of fiscal challenge you can always count on government to come up with some pretty bad ideas to fund deficits. House Bill 1192 is a particularly egregious example of one such boneheaded idea. The bill as it is currently constructed would place a tax on all software purchased or installed in Colorado. This is a tax not just on the software industry but on every business that uses software. And it’s an incredibly stupid idea. …
January 26, 2010· 2 min read