Print This Page

Date:   11 Mar 2008
From:   Navraj

Hello Michael,

I am a senior executive in a small company. I negotiated to receive 10% equity in the company.

The owner says there is no way he can make a stock grant to me without my incurring a big tax. He suggested that I accept a stock option, instead.

I would rather own the stock and might be willing to borrow the money to pay the taxes.

What do you think?

Answer

Date:   14 Mar 2008

Hello Navraj,

I think that it usually isn’t wise to incur a significant cash investment (of taxes) for illiquid stock. It sounds like this is a closely held company and there is no market for the stock. Unless you expect a “liquidity event” in the foreseeable future, a stock grant probably isn’t a good choice.

Before you make your decision, see if you can find out what the stock valuation would be. A study should be done whether the grant is of stock or an option. If the value is small, there is little risk in going ahead with the grant. Note that the value of minority interests in closely held stock should be discounted significantly. (Say at least 30%.)

If you receive an option, you could eventually have to get the cash to pay for it. Perhaps the company could give you a cash bonus to pay for it.

Good luck!

Mike Gray

For more answers to our readers' questions and to learn about new tax developments relating to employee stock options, subscribe to our newsletter, Michael Gray, CPA's Option Alert!

IRS Circular 230 Disclosure: As required by U.S. Treasury Regulations, you are hereby advised that any written tax advice contained in this answer was not written or intended to be used (and cannot be used) by any taxpayer for the purpose of avoiding penalties that may be imposed under the U.S. Internal Revenue Code.