Abstract

http://ssrn.com/abstract=532283
 
 

Citations



 


 



Restricted Stock Notes


David W. Mayo


Gibson, Dunn & Crutcher LLP


Tax Lawyer, Vol. 57, No. 3, Fall 2003

Abstract:     
The 1990s saw an increasing use of equity-based compensation, most notably among dot com and other technology companies where stock options were seen as the path to quick riches at no cash cost to the issuer. Along with the increased use of equity-based compensation came increased efforts to avoid the principal downside of stock options, the realization of ordinary income on exercise, through the use of restricted stock. Restricted stock, however, requires the outlay of cash, either to the issuing corporation as a payment for the stock or to the government in payment of the taxes due on its vesting (or issuance, if a section 83(b) election, discussed below, is made). Sufficient cash for either purpose often would not be available to an employee who is to receive equity-based compensation, and in the start-up context the employer often would be unable to lend the employee cash to pay the taxes.

A transaction using a restricted stock note, which provides for the payment for restricted stock with a note issued by the employee, if properly structured, was thought to solve all of these problems. The restricted stock note provided payment for the restricted stock without the immediate outlay of cash by the employee to the employer, and because full fair market value would be paid for the restricted stock, no taxes would be due if the recipient were to make a section 83(b) election. As a result of the section 83(b) election the ordinary income that would arise on the exercise of a stock option would be avoided.

The problems that were not foreseen, however, were those caused by a falling stock market or, more specifically, a drop in the price of the stock of the employer. Most significant to the employee are the problems of repayment and of default on the restricted stock note if the market value of the restricted stock were to fall below the amount of the note. Inability to repay leads to issues regarding the characterization of full or partial forgiveness of the notes for both the employee and the employer.

Part I of this article discusses the structure and treatment of the issuance of restricted stock for restricted stock notes. Part II considers the potential consequences to employees of restructuring a restricted stock note, including partial and complete forgiveness and conversion of recourse notes to nonrecourse notes. Part III deals with the consequences to an employer of the restructuring of a restricted stock note.

Accepted Paper Series


Not Available For Download

Date posted: April 19, 2004  

Suggested Citation

Mayo, David W., Restricted Stock Notes. Tax Lawyer, Vol. 57, No. 3, Fall 2003. Available at SSRN: http://ssrn.com/abstract=532283

Contact Information

David W. Mayo (Contact Author)
Gibson, Dunn & Crutcher LLP ( email )
200 Park Avenue, 47th Floor
New York, NY 10166-0193
United States
Feedback to SSRN


Paper statistics
Abstract Views: 2,275

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.265 seconds