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PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

Mar 19, 2020, 11:28 AM
Publication Type(s):
Client Alerts
Exlcude on home page:
No

Click here to read more from our Coronavirus series.

As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

Section 409A – Option Exercise Price Valuations

Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

Partnership Profit Interest Valuation

For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

Consider COVID-19 Valuation Implications Before Granting Equity Compensation

Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



[1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

[2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

Click here to read more from our Coronavirus series.

IsRss:
  • tax law
  • employment
  • client alerts

6 comments

Leave a comment
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  3. rogerlagasca | Jul 03, 2020
    Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
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  5. rogerlagasca | Jul 02, 2020
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    Client Alert

    PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

    Mar 19, 2020, 11:28 AM
    Publication Type(s):
    Client Alerts
    Exlcude on home page:
    No

    Click here to read more from our Coronavirus series.

    As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

    Section 409A – Option Exercise Price Valuations

    Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

    Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

    Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

    Partnership Profit Interest Valuation

    For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

    Consider COVID-19 Valuation Implications Before Granting Equity Compensation

    Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



    [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

    [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

    Click here to read more from our Coronavirus series.

    IsRss:
    • tax law
    • employment
    • client alerts

    6 comments

    Leave a comment
    1. lospis espo | Jul 08, 2020
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    2. rogerlagasca | Jul 06, 2020
    3. rogerlagasca | Jul 03, 2020
      Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
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    5. rogerlagasca | Jul 02, 2020
    6. rogerlagasca | Jul 01, 2020
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      Leave a comment

      LABOR & EMPLOYMENT

      PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

      Mar 19, 2020, 11:28 AM
      Publication Type(s):
      Client Alerts
      Exlcude on home page:
      No

      Click here to read more from our Coronavirus series.

      As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

      Section 409A – Option Exercise Price Valuations

      Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

      Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

      Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

      Partnership Profit Interest Valuation

      For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

      Consider COVID-19 Valuation Implications Before Granting Equity Compensation

      Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



      [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

      [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

      Click here to read more from our Coronavirus series.

      IsRss:
      • tax law
      • employment
      • client alerts

      6 comments

      Leave a comment
      1. lospis espo | Jul 08, 2020
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      2. rogerlagasca | Jul 06, 2020
      3. rogerlagasca | Jul 03, 2020
        Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
      4. rogerlagasca | Jul 02, 2020
      5. rogerlagasca | Jul 02, 2020
      6. rogerlagasca | Jul 01, 2020
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        Leave a comment

        FINANCIAL REGULATION & THE CARES ACT

        PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

        Mar 19, 2020, 11:28 AM
        Publication Type(s):
        Client Alerts
        Exlcude on home page:
        No

        Click here to read more from our Coronavirus series.

        As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

        Section 409A – Option Exercise Price Valuations

        Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

        Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

        Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

        Partnership Profit Interest Valuation

        For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

        Consider COVID-19 Valuation Implications Before Granting Equity Compensation

        Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



        [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

        [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

        Click here to read more from our Coronavirus series.

        IsRss:
        • tax law
        • employment
        • client alerts

        6 comments

        Leave a comment
        1. lospis espo | Jul 08, 2020
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        2. rogerlagasca | Jul 06, 2020
        3. rogerlagasca | Jul 03, 2020
          Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
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        5. rogerlagasca | Jul 02, 2020
        6. rogerlagasca | Jul 01, 2020
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          ASSET MANAGEMENT

          PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

          Mar 19, 2020, 11:28 AM
          Publication Type(s):
          Client Alerts
          Exlcude on home page:
          No

          Click here to read more from our Coronavirus series.

          As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

          Section 409A – Option Exercise Price Valuations

          Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

          Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

          Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

          Partnership Profit Interest Valuation

          For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

          Consider COVID-19 Valuation Implications Before Granting Equity Compensation

          Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



          [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

          [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

          Click here to read more from our Coronavirus series.

          IsRss:
          • tax law
          • employment
          • client alerts

          6 comments

          Leave a comment
          1. lospis espo | Jul 08, 2020
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          2. rogerlagasca | Jul 06, 2020
          3. rogerlagasca | Jul 03, 2020
            Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
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          5. rogerlagasca | Jul 02, 2020
          6. rogerlagasca | Jul 01, 2020
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            Leave a comment

            TAX LAW

            PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

            Mar 19, 2020, 11:28 AM
            Publication Type(s):
            Client Alerts
            Exlcude on home page:
            No

            Click here to read more from our Coronavirus series.

            As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

            Section 409A – Option Exercise Price Valuations

            Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

            Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

            Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

            Partnership Profit Interest Valuation

            For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

            Consider COVID-19 Valuation Implications Before Granting Equity Compensation

            Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



            [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

            [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

            Click here to read more from our Coronavirus series.

            IsRss:
            • tax law
            • employment
            • client alerts

            6 comments

            Leave a comment
            1. lospis espo | Jul 08, 2020
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            2. rogerlagasca | Jul 06, 2020
            3. rogerlagasca | Jul 03, 2020
              Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
            4. rogerlagasca | Jul 02, 2020
            5. rogerlagasca | Jul 02, 2020
            6. rogerlagasca | Jul 01, 2020
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              Leave a comment

              REAL ESTATE & HOSPITALITY

              PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

              Mar 19, 2020, 11:28 AM
              Publication Type(s):
              Client Alerts
              Exlcude on home page:
              No

              Click here to read more from our Coronavirus series.

              As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

              Section 409A – Option Exercise Price Valuations

              Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

              Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

              Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

              Partnership Profit Interest Valuation

              For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

              Consider COVID-19 Valuation Implications Before Granting Equity Compensation

              Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



              [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

              [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

              Click here to read more from our Coronavirus series.

              IsRss:
              • tax law
              • employment
              • client alerts

              6 comments

              Leave a comment
              1. lospis espo | Jul 08, 2020
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                Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
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                DISPUTES

                PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

                Mar 19, 2020, 11:28 AM
                Publication Type(s):
                Client Alerts
                Exlcude on home page:
                No

                Click here to read more from our Coronavirus series.

                As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

                Section 409A – Option Exercise Price Valuations

                Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

                Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

                Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

                Partnership Profit Interest Valuation

                For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

                Consider COVID-19 Valuation Implications Before Granting Equity Compensation

                Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



                [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

                [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

                Click here to read more from our Coronavirus series.

                IsRss:
                • tax law
                • employment
                • client alerts

                6 comments

                Leave a comment
                1. lospis espo | Jul 08, 2020
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                2. rogerlagasca | Jul 06, 2020
                3. rogerlagasca | Jul 03, 2020
                  Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
                4. rogerlagasca | Jul 02, 2020
                5. rogerlagasca | Jul 02, 2020
                6. rogerlagasca | Jul 01, 2020
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                  Leave a comment

                  PRIVACY & CYBERSECURITY

                  PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

                  Mar 19, 2020, 11:28 AM
                  Publication Type(s):
                  Client Alerts
                  Exlcude on home page:
                  No

                  Click here to read more from our Coronavirus series.

                  As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

                  Section 409A – Option Exercise Price Valuations

                  Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

                  Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

                  Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

                  Partnership Profit Interest Valuation

                  For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

                  Consider COVID-19 Valuation Implications Before Granting Equity Compensation

                  Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



                  [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

                  [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

                  Click here to read more from our Coronavirus series.

                  IsRss:
                  • tax law
                  • employment
                  • client alerts

                  6 comments

                  Leave a comment
                  1. lospis espo | Jul 08, 2020
                    I can see that you are an expert at your field! I am launching a website soon, and your information will be very useful for me.. Thanks for all your help and wishing you all the success in your business. 법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  I'm glad I found this web site, I couldn't find any knowledge on this matter prior to.Also operate a site and if you are ever interested in doing some visitor writing for me if possible feel free to let me know, im always look for people to check out my web site.
                  2. rogerlagasca | Jul 06, 2020
                  3. rogerlagasca | Jul 03, 2020
                    Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
                  4. rogerlagasca | Jul 02, 2020
                  5. rogerlagasca | Jul 02, 2020
                  6. rogerlagasca | Jul 01, 2020
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                    Leave a comment

                    SECURITIES & CAPITAL MARKETS

                    PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

                    Mar 19, 2020, 11:28 AM
                    Publication Type(s):
                    Client Alerts
                    Exlcude on home page:
                    No

                    Click here to read more from our Coronavirus series.

                    As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

                    Section 409A – Option Exercise Price Valuations

                    Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

                    Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

                    Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

                    Partnership Profit Interest Valuation

                    For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

                    Consider COVID-19 Valuation Implications Before Granting Equity Compensation

                    Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



                    [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

                    [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

                    Click here to read more from our Coronavirus series.

                    IsRss:
                    • tax law
                    • employment
                    • client alerts

                    6 comments

                    Leave a comment
                    1. lospis espo | Jul 08, 2020
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                    3. rogerlagasca | Jul 03, 2020
                      Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
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                    5. rogerlagasca | Jul 02, 2020
                    6. rogerlagasca | Jul 01, 2020
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                      EUROPE

                      PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

                      Mar 19, 2020, 11:28 AM
                      Publication Type(s):
                      Client Alerts
                      Exlcude on home page:
                      No

                      Click here to read more from our Coronavirus series.

                      As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

                      Section 409A – Option Exercise Price Valuations

                      Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

                      Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

                      Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

                      Partnership Profit Interest Valuation

                      For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

                      Consider COVID-19 Valuation Implications Before Granting Equity Compensation

                      Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



                      [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

                      [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

                      Click here to read more from our Coronavirus series.

                      IsRss:
                      • tax law
                      • employment
                      • client alerts

                      6 comments

                      Leave a comment
                      1. lospis espo | Jul 08, 2020
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                      2. rogerlagasca | Jul 06, 2020
                      3. rogerlagasca | Jul 03, 2020
                        Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
                      4. rogerlagasca | Jul 02, 2020
                      5. rogerlagasca | Jul 02, 2020
                      6. rogerlagasca | Jul 01, 2020
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                        Leave a comment

                        LATIN AMERICA

                        PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

                        Mar 19, 2020, 11:28 AM
                        Publication Type(s):
                        Client Alerts
                        Exlcude on home page:
                        No

                        Click here to read more from our Coronavirus series.

                        As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

                        Section 409A – Option Exercise Price Valuations

                        Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

                        Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

                        Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

                        Partnership Profit Interest Valuation

                        For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

                        Consider COVID-19 Valuation Implications Before Granting Equity Compensation

                        Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



                        [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

                        [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

                        Click here to read more from our Coronavirus series.

                        IsRss:
                        • tax law
                        • employment
                        • client alerts

                        6 comments

                        Leave a comment
                        1. lospis espo | Jul 08, 2020
                          I can see that you are an expert at your field! I am launching a website soon, and your information will be very useful for me.. Thanks for all your help and wishing you all the success in your business. 법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  I'm glad I found this web site, I couldn't find any knowledge on this matter prior to.Also operate a site and if you are ever interested in doing some visitor writing for me if possible feel free to let me know, im always look for people to check out my web site.
                        2. rogerlagasca | Jul 06, 2020
                        3. rogerlagasca | Jul 03, 2020
                          Please let me know if you’re looking for a article writer for your site. You have some really great posts and I feel I would be a good asset. If you ever want to take some of the load off, I’d absolutely love to write some material for your blog in exchange for a link back to mine. Please send me an email if interested. Thank you! ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com ashraf-dev.com Thanks for your post. I’ve been thinking about writing a very comparable post over the last couple of weeks, I’ll probably keep it short and sweet and link  to this instead if thats cool. Thanks.
                        4. rogerlagasca | Jul 02, 2020
                        5. rogerlagasca | Jul 02, 2020
                        6. rogerlagasca | Jul 01, 2020
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                          Leave a comment

                           

                          KEY INSIGHTS

                          PH COVID-19 Client Alert Series: COVID-19 and Equity Compensation Valuations

                          Mar 19, 2020, 11:28 AM
                          Publication Type(s):
                          Client Alerts
                          Exlcude on home page:
                          No

                          Click here to read more from our Coronavirus series.

                          As companies consider the business impacts of the 2019 Novel Coronavirus (“COVID-19”), it is important to recognize that the effects of COVID-19 may be a significant intervening event such that prior valuations may no longer be reasonable for equity compensation grant purposes.

                          Section 409A – Option Exercise Price Valuations

                          Section 409A of the Internal Revenue Code of 1986, as amended, (“Section 409A”) generally imposes adverse tax consequences on U.S. taxpayers who are granted options with an exercise price less than fair market value of the covered shares on the date of grant. For public companies, a fair market value determination is simple; fair market value is determined by reference to a publicly reported price, typically the per share closing price on the trading day before the date of grant or the closing price on the date of grant. For private companies, Section 409A requires that fair market value for option grant purposes be determined “by the reasonable application of a reasonable valuation methodology.”

                          Section 409A regulations contain a list of factors to be considered for a valuation methodology to be reasonable. These factors include various financial metrics, the market value of equity in similar companies engaged in substantially similar trade or business, which can be determined through nondiscretionary, objective means (such as a publicly reported trading prices), and recent arm’s-length transactions involving the sale of the equity to be valued. Furthermore, a valuation determined by an independent appraisal, as of a date no more than 12 months prior to the option grant date, is presumed to be reasonable if the valuation meets the requirements of Section 401(a)(28)(C) of the Internal Revenue Code of 1986, as amended, and the regulations promulgated thereunder.

                          Many private companies obtain an annual “409A valuation” to support option grant exercise prices. Often a private company board will rely on the valuation for 12 months. Private equity portfolio companies frequently rely on the private equity fund acquisition purchase price as an indicator of valuation for 12 months and then commence an annual valuation process. Venture capital-backed companies often look to financings within the prior 12 months as an indication of fair market value.

                          Partnership Profit Interest Valuation

                          For companies that grant partnership profit interests, a similar valuation exercise occurs. Grants of profit interest awards must be structured to provide that the recipient is not entitled to any distributions if, immediately prior to the grant of the award, the partnership’s assets were sold at fair market value and the proceeds were distributed in a complete liquidation of the partnership. Often, this is stated as requiring that holders of profit interest awards be entitled to benefit only from future appreciation or future profits. If a partnership grants an award that had been intended to be an award of profits interests, but the grant is based on a valuation less than actual current partnership fair market value, the award is taxed as a capital interest and not as a profit interest award. [1]

                          Consider COVID-19 Valuation Implications Before Granting Equity Compensation

                          Significant events, such as the business impacts of COVID-19, call into question prior valuations. Section 409A regulations provide that “the use of a value previously calculated under a valuation method is not reasonable as of a later date if such calculation fails to reflect information available after the date of the calculation that may materially affect the value of the corporation.” A similar analysis holds for the grant of partnership profit interest awards—valuations should take into account all current information that may affect the value of the granting entity. Granting options with an exercise price greater than fair market value, while perhaps not intended, is not problematic from the tax perspective; a company may always grant premium priced options. Similarly, “premium valuation” profit interest awards do not result in a loss of profit interest status. However, if company value has increased as a result of COVID-19,[2] a managing board may not realize that it is granting “discount” options (i.e., options with an exercise price less than fair market value) or that it is granting partnership equity that does not qualify as a profit interest award. While a managing board or the appropriate board committee should always consider whether a prior valuation still holds whenever equity compensation is granted, it is imperative that companies granting equity compensation in the near future consider the valuation implications of COVID-19.



                          [1]   The grant of capital interests result in tax on vesting, or, in some cases, upon grant. Profit interest awards are not taxed on grant or vesting.

                          [2]   An increase in value could occur because of the industry in which a company operates (for example, production of in demand medical equipment or hand sanitizer, provision of supply-chain management and support, or facilitation of work from home arrangements). An increase in value also could occur because a company has a major competitor experiencing a significant disruption to its workforce (for example, a competitor’s only manufacturing operations are in a European country experiencing shutdowns and the competitor is not able to deliver product to the marketplace).

                          Click here to read more from our Coronavirus series.

                          IsRss:
                          • tax law
                          • employment
                          • client alerts

                          6 comments

                          Leave a comment
                          1. lospis espo | Jul 08, 2020
                            I can see that you are an expert at your field! I am launching a website soon, and your information will be very useful for me.. Thanks for all your help and wishing you all the success in your business. 법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  법인장  I'm glad I found this web site, I couldn't find any knowledge on this matter prior to.Also operate a site and if you are ever interested in doing some visitor writing for me if possible feel free to let me know, im always look for people to check out my web site.
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