This is different from deferred compensation in the form of elective deferrals to qualified plans (such as a 401(k) plan) or to a 403(b) or 457(b) plan.
If deferred compensation meets the requirements of Section 409A, then there is no effect on the employee’s taxes. The compensation is taxed in the same manner as it would be taxed if it were not covered by Section 409A. If the arrangement does not meet the requirements of Section 409A, the compensation is subject to certain additional taxes, including a 20% additional income tax. Section 409A has no effect on FICA (Social Security and Medicare) tax.
Silicon Valley startups often target having their 409a valuation come in around 1/5th the price of the most recently sold Preferred Stock.
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- StartupA startup company is an entrepreneurial venture in the initial stage of its operations. Startups are typically young businesses aiming to grow quickly and meet a marketplace need by developing or offering an innovative product, process or service.
- CompanyA company, abbreviated 'co.', is a legal entity made up of an association of people, be they natural, legal, or a mixture of both, for carrying on a commercial or industrial enterprise.
- Common StockCommon stock is a form of corporate equity ownership, a type of security.
- Strike PriceThe strike price (or exercise price) of an option is the price per share at which the owner of the option can buy (call option), or sell (put option), the underlying security.
- Employee CompensationEquity compensation is pay to a stakeholder in a company that comes in the form of ownership in a company. This could come in the form of options, shares or restricted stock.
- Carta (company)Carta (formerly eShares) is a San Francisco based cap table management platform that offers 409A valuations, products for investors and public companies.