Dear CEO: Congratulations on signing the letter of intent to sell your company (a corporation or an entity treated as a corporation for tax purposes)! You’ve agreed on terms for your go-forward employment with the buyer, your board of directors has agreed to accelerate the vesting of your stock options, and you’ve been promised a retention bonus. It’s all smooth sailing from here … except there’s a relatively obscure section of the U.S. tax code—Section 280G, adopted during the “Barbarians at the Gate” takeover era in the 1980s—that could put a significant portion of any compensatory payments you are receiving in the deal at risk of a large excise tax and prohibit the buyer from taking a tax deduction for that portion of the compensation they are paying you.

The good news is that there is a workaround that privately held companies can use to avoid that tax. By obtaining a “cleansing” vote from more than 75 percent of your stockholders (those who are eligible to vote on the matter— more on that later), you can avoid the excise tax and the buyer can take the tax deduction for your compensation. However, there is a catch (and here’s the part you are going to really hate): to take advantage of this cleansing vote, you are going to have to put that portion of your compensatory payments at risk of complete forfeiture, and every single one of your stockholders (yes, even the former employee who exercised options and left on bad terms and is now working for a direct competitor) will know exactly what kinds of compensatory payments you are getting in the deal.

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