Startup Company Carve-Out Plans: Mechanics, Tax Obstacles, and Optimization

Hosted By: Thomson Reuters

Startups love using equity to incentivize executives and employees. But when a company’s equity isn’t worth what it used to be--and particularly when stakeholders no longer expect there to be significant upside--companies need to find new ways to incentivize management to achieve desired outcomes. Many startups in this situation turn to liquidity bonus plans, commonly known as carve-out plans.

A carve-out plan is a type of instrument to incentivize current executives, employees and other service providers by committing to make a payout at a change in control. This arrangement allows the executives working hard to get a struggling company to a liquidity event to share in the value they create for the shareholders. Carve-out plans are typically tense negotiations of competing interests to encourage retention for senior management and maximize value for shareholders. To further complicate matters, carve-out plans are subject to a unique and complicated set of tax rules.

Join Practical Law, along with presenters from Fenwick & West LLP, for a discussion that will highlight common constraints on carve-out pla​ns in the U.S. tax regime, including Section 409A (regulating deferred compensation arrangements) and Section 280G (regulating golden parachute payments). We will also discuss new proposed regulations and recent Delaware case law on these topics.

Gain insights on the following:

  • Should compensatory arrangements be reduced for other payouts?
  • Should the carve-out awards settle in stock or cash?
  • Must employees be employed at the time of the change in control to receive a payout? Should the carve-out forfeit under certain conditions?
  • What should happen to the forfeited amounts?
  • How can the plan be amended?

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