If you are not familiar with the excise tax on parachute payments, Sections 280G and 4999 of the Internal Revenue Code impose a 20% excise tax on compensatory payments made in connection with a change in control transaction to certain persons (typically, executive officers) that exceed 3x average annual salary.
Why is this a bad deal for startups?
Because very often founders work for very little salary income. Thus, it is not difficult for founders to exceed 3x of a low salary amount if they are to receive a bonus contingent on a change in control transaction.
I have been writing posts about what the White House’s Startup America initiative can do to make life better for startups. A significant theme of the Startup America initiative is reducing regulatory burdens and complexity of laws applicable to startups.
My suggestion for today–exempt startups and companies beneath a certain size level from Section 280G.