I'm starting to see companies tossing around the idea of "Phantom Stock Options"; that is, shares kept purely on paper that are never issued to the employee. Upon a liquidity event, the employee can exercise the shares and be paid their value as regular income.
This has some tradeoffs, some of them positive, some of them negative, but I am far from an expert I would love some input from somebody who knows more.
It does appear to be vastly simpler for all parties, and completely eliminates any possibility of a tax trap. However it seems to guarantee that you will be paying income tax on the sale, which can be quite sizable. And the specifics of what happens after you leave, voluntarily or otherwise, is incredibly important considering that you are never granted any actual stock.
It is highly likely that the IRS would treat any instrument described as "Like a stock option, except minus the tax treatment for stock options" as "a stock option." The magic words to ask your accountant about are "substance over form doctrine."
One of many consequences: an informal agreement, backed by paper or otherwise, to give you compensation in event of an acquisition, where that agreement survives your departure from the firm, is taxable at ordinary income rates on at its fair-market value. This income is realized in advance of the eventual acquisition/sale. That's why startupers care so much about their 83(b) elections, because otherwise that landmine bankrupts people.
This has some tradeoffs, some of them positive, some of them negative, but I am far from an expert I would love some input from somebody who knows more.
It does appear to be vastly simpler for all parties, and completely eliminates any possibility of a tax trap. However it seems to guarantee that you will be paying income tax on the sale, which can be quite sizable. And the specifics of what happens after you leave, voluntarily or otherwise, is incredibly important considering that you are never granted any actual stock.