Drafting a US private company equity compensation plan
Produced in partnership with Michael J. Collins of Gibson, Dunn & Crutcher (Washington DC)
Drafting a US private company equity compensation plan

The following Share Incentives guidance note Produced in partnership with Michael J. Collins of Gibson, Dunn & Crutcher (Washington DC) provides comprehensive and up to date legal information covering:

  • Drafting a US private company equity compensation plan
  • Legal issues
  • Plan drafting
  • Section 83(i) eligible plans

US privately held companies often like to incentivise their executives and other key employees through equity compensation grants, in order to better align their interests with those of the company's equity holders. In many respects, equity compensation plans for US privately held companies resemble those of public companies (see Practice Note: Designing a US public company equity compensation plan). However, a number of significant differences exist due primarily to the illiquidity of the stock, including a new opportunity to allow certain equity grantees to defer taxation for up to five years under US section 83(i) of the Internal Revenue Code (IRC) pursuant to 2017 tax reform legislation (section 83(i)).

This Practice Note is organised in the following sections:

  1. Legal issues

  2. Plan drafting, and

  3. Section 83(i) eligible plans

Legal issues

US tax issues

The only two special US tax rules that apply to equity awards of privately held companies concern tax-favoured incentive stock options (ISOs) and the new section 83(i) election available for certain award recipients under eligible broad-based equity plans discussed later in this Practice Note.

To be eligible for ISO status under IRC, s 422, the awards must be granted under a plan that:

  1. is approved by the company shareholders within the 12 months before or after plan adoption

  2. provides for the grant of ISO awards that comply with the requirements