Looking for advice on gifting equity to key employee(s)

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April 30, 2024

by a searcher from Boston College in Dallas, TX, USA

I have come across a few deals to this point that have a key employee in place. My thoughts are to gift a small portion of equity initial and establish performance and retention options for the remaining amount in hopes of retaining that employee. The pool of equity would be a blending of the seller and buyer, say 10% in total, with 5% upfront and 1% per year thereafter up to year 5.


My question is who is on the hook for the tax liability (if any) for the gifting of equity and is there any way to mitigate or reduce that liability if it exists?

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Reply by a searcher
from University of Maryland in 4040 Civic Center Dr, San Rafael, CA 94903, USA
This can be a very complicated tax subject if you do it by the book :) Generally that "gift" , or equity grant, would be taxed as ordinary income based on some kind of valuation of the shares granted (for instance a 409A). If there is any kind of vesting there are some additional things that could be done now to minimize the burden later (like an 83b election)

There are def. other ways to achieve similar outcome without going through the complication of granting actual equity and dilution (things such as Phantom stock for example)...but generally taxes should / will always be involved and the difference between what is ordinary income vs capital gains will be a key consideration as well given the form that is given.
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Reply by a searcher
from Duquesne University in Pittsburgh, PA, USA
You could look into Phantom Equity Plans, Profits Interest Plans, Option Plans (ESOPS or Others), or just straight equity grants. This isn't tax and/or legal advice, but any "grant" would be taxable if it had a value on the grant date. You'll likely want to do something that doesn't cause a taxable event (as the employee likely doesn't have the cash to pay the tax), and often times the benefit of a true equity structure (capital gains tax rates) can be problematic for the employee as it puts their tax situation on its head. Phantom plans solve this, but don't get preferred tax treatment. Again, not tax or legal advice, just some of the high level options and issues I've seen.
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