Employee Compensation – The Issue of Stock Options

I have not had a more common question from clients than whether or not they can issue “penny warrants” to their employees, friends, family, etc.  The answer is that unless your company is only worth a penny, no.  Issuing any kind of equity at a price below the fair market value results in significant adverse tax consequences to the recipient.  With respect to employee compensation, issuing stock options at an exercise price below the then fair market value of the stock can trigger significant adverse tax consequences under Rule 409A of the Internal Revenue Code (including a potential immediate tax liability and 20% tax penalty to the employee).  More on valuation and employee compensation is contained in other sections of this Blog.

Advertisement