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Structuring Management Carve-Out Plans for Privately Held Corporations: Mechanics, Tax Obstacles and Optimization

Guidance for Employee Benefits Counsel on Private Company Liquidity Bonus Plan Compensation Arrangements

Note: CPE credit is not offered on this program

Recording of a 90-minute premium CLE webinar with Q&A

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Conducted on Wednesday, June 3, 2020

Recorded event now available

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This CLE course will provide employee benefits counsel with guidance on the use of private company liquidity bonus plans to increase incentive and retain current employees. The panel will outline the mechanics of these compensatory arrangements, also known as carve-out plans, discuss strategic considerations and how to reconcile the competing interests of senior management and shareholders, and highlight the tax implications counsel must be aware of when structuring management carve-out plans.

Description

Private company liquidity bonus plans--also referred to as management carve-out plans--are a type of instrument used to incent current employees by committing to make a payout on a later date or a change in control. Unlike typical equity instruments, which may be settled in shares that may vote and may (under some circumstances) give rise to capital gain taxation, carve-out plans are compensatory contracts that allow service providers to share in the value they build in a company.

Structuring these arrangements raises many strategic questions. Should the carve-out be reduced for other payouts? Should the carve-out awards settle in stock or cash? Should people be forced to be present at the change in control to receive a payout? Should the carve-out forfeit under certain conditions? What should happen to the forfeited amounts? How can the plan be amended?

A carve-out plan is usually a tense negotiation of competing interests to encourage retention for senior management and maximize value for shareholders. These mechanical choices evidence this tension. This presentation will highlight these mechanical choices and discuss common trends in the startup scene.

To further complicate matters, carve-out plans are subject to a unique and complicated set of tax rules. This discussion will highlight common constraints on carve-out plans in the U.S. tax regime, including Section 409A (regulating deferred compensation arrangements) and 280G (regulating golden parachute payments).

Listen as our experienced panel discusses the use of private company liquidity bonus plans to incent and retain current employees. The panel will outline the mechanics of these management carve-out plans, discuss strategic considerations and how to reconcile the competing interests of senior management and shareholders, and highlight the tax implications counsel must be aware of when structuring management carve-out plans.

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Outline

  1. Why do private companies adopt carve-out plans?
    1. Maintain liquidity to retain employees
    2. Don't want to offer other equity alternatives (stock, options, RSUs)
    3. The flexibility of a corporation with the ability to provide comparable awards to LLC or partnership
  2. Mechanics
    1. Binding right to an award or board discretion?
    2. Drafting alternatives for structuring carve-out plans
    3. Does the executive need to be employed on the payment date?
    4. What if there is a call option on a majority of the shares? Should that trigger?
    5. Post-closing merger conditions issues
  3. Tax impediments to goals
    1. Section 409A
    2. Section 280G
  4. Trends in carve-out plans in the startup scene

Benefits

The panel will review these and other key issues:

  • Consequences of a Section 409A violation and tips on bypassing or complying with 409A
  • Carve-out plan alternatives, including phantom units tied to share value and percentage of net consideration
  • Options for cleansing golden parachutes subject to Section 280G
  • Carve-out payments and escrow/earnout issues

Faculty

Gartland, Elizabeth
Elizabeth A. Gartland
Partner
Fenwick & West

Ms. Gartland focuses her practice on compensation and employee benefits matters for public and private companies that...  |  Read More

Mort, Marshall
Marshall Mort
Partner
Fenwick & West

Mr. Mort focuses his practice on representation of public and private technology and life sciences companies in a wide...  |  Read More

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