The 280G Golden Parachute Trap for Founders
The 20% excise tax that catches founders upon exit, and how to clear it
by
Teddy Ellison
AI & Data Agreements
Summary
Section 280G, the golden parachute tax, is a 20% excise tax you can owe personally when your company is sold. If your change-in-control payments reach three times your recent average pay, the tax hits everything above one year of that pay, and the company loses its deduction. A shareholder vote before closing can clear it.
Section 280G is the tax rule behind the term golden parachute, the payout an executive collects when a company is sold. Past its threshold, the IRS collects 20% from you and disallows the company's deduction. The rule measures that pay against salary. Founders keep salaries low, so the trigger sits far lower for them than for the executives the rule is named for.
For everything else the sale decides, the letter of intent, escrow and earnouts, the seller non-compete, and the rest of your tax bill, see M&A Considerations for Founders.
How does the 280G golden parachute tax work?
Section 280G applies when your change-in-control payments, what the statute calls parachute payments, reach three times your base amount. The base amount is your average annual W-2 pay over the five years before the deal, or over the company's life if that is shorter. The equity you hold does not raise that average, so a founder on a modest salary is measured against a small number.
If your payments stay under three times base, no tax applies. If they reach it, everything above one times base becomes an excess parachute payment. Section 4999 taxes that excess at 20%, on you personally and on top of your ordinary income tax, and the company loses its deduction on the same amount. Deal lawyers call it the one-dollar cliff.
Take a founder who has paid themselves $200,000 a year for the past five years, which makes the base amount $200,000 and the three-times mark $600,000. The deal accelerates unvested equity that counts as $450,000 under the 280G rules and adds a retention bonus for staying through the closing.
Change-in-control payments | Total | Your 20% excise tax | Company's lost deduction |
$450,000 acceleration + $140,000 bonus | $590,000 | $0 | $0 |
$450,000 acceleration + $160,000 bonus | $610,000 | $82,000 | $410,000 |
Almost everything the sale pays you counts toward that total. The statute covers accelerated vesting, retention and transaction bonuses, and severance alike, because each is compensation contingent on the change in control. The total can clear three times base without any single payment looking excessive.
How do founders avoid the 280G excise tax?
A privately held company can eliminate the tax with a shareholder approval known as a cleansing vote, written into Section 280G itself. The exception applies when the company's stock was not readily tradeable on a public market before the change. Holders of more than 75% of the voting power must approve the payments, after full disclosure. With that approval, the payments stop being parachute payments and the 20% tax never attaches.
The vote needs lead time. The founders receiving the payments can't vote their own shares, so approval has to come from the other holders. Each recipient also signs a waiver first, giving up the payment entirely if the vote fails. If the vote is still being assembled in signing week, the deal either waits or the exception is lost.
The test looks only at your company's stock before the deal, so a private startup bought by a public acquirer can still use the vote. Every voting shareholder, though, sees what each insider stands to collect, and some founders would rather not put those numbers in front of the whole cap table.
Plan for 280G before the letter of intent
You can get an early read yourself by adding up what the deal would pay you and comparing it to three times your recent average pay. The exact number takes more work, because accelerated options have to be valued under the regulation's own rules and the payments only count in aggregate. On the numbers above, a $20,000 difference in one bonus separates owing nothing from owing $82,000.
A reasonable-compensation valuation carves your post-closing non-compete out of the parachute total, and the statute accepts it only on clear and convincing evidence. A cutback trims the payments to just under the threshold and costs you the difference. Between those two and the cleansing vote, which one fits depends on your cap table, how far over you are, and the time left before signing. Serotonin Legal works through it with founders.
Reach out to set up a free consultation.
Serotonin Legal advises technology founders on corporate, regulatory, and transactional matters at the intersection of AI, blockchain, and fintech. This guide is for general informational purposes and does not constitute legal advice. No attorney-client relationship is formed by reading this material.
FAQs
What is a golden parachute payment?
Golden parachute payments are compensation triggered by a change in control, like accelerated equity or a deal bonus. Under Section 280G they are counted together, and the name applies once the total to one person reaches three times that person's base amount.
Who is a disqualified individual under 280G?
The rules apply only to a disqualified individual, meaning an officer, a shareholder who owns more than 1% of the company by value, or one of the highest-paid employees. Founders typically qualify twice over, as officers and as shareholders above the 1% line. Status is tested over the twelve months ending on the date of the change in control.
How is the 280G excise tax calculated?
Start with your base amount, your average annual W-2 pay over the five years before the sale. Add up every payment the closing triggers and compare that total to three times the base. If it reaches the threshold, the excise tax equals 20% of everything above one times the base amount. The math runs person by person, so each founder and executive gets a separate answer.
Who pays the 280G excise tax?
You do, personally. Section 4999 collects the 20% from the person who receives the excess parachute payment, and where the payment runs through payroll it comes out as withholding. The company's cost is the lost deduction on the same amount.
What is a 280G cleansing vote?
A cleansing vote is the shareholder approval that exempts change-in-control payments at a privately held company from the 20% golden parachute excise tax. The approval needs more than 75% of the voting power, counted without the shares of anyone in line for the payments, and voters see the amounts first. The recipients waive the payments unless shareholders approve, and the waivers, disclosure, and vote must all finish before the change in control.
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The 280G Golden Parachute Trap for Founders
The 20% excise tax that catches founders upon exit, and how to clear it
by
Teddy Ellison
AI & Data Agreements
Summary
Section 280G, the golden parachute tax, is a 20% excise tax you can owe personally when your company is sold. If your change-in-control payments reach three times your recent average pay, the tax hits everything above one year of that pay, and the company loses its deduction. A shareholder vote before closing can clear it.
Section 280G is the tax rule behind the term golden parachute, the payout an executive collects when a company is sold. Past its threshold, the IRS collects 20% from you and disallows the company's deduction. The rule measures that pay against salary. Founders keep salaries low, so the trigger sits far lower for them than for the executives the rule is named for.
For everything else the sale decides, the letter of intent, escrow and earnouts, the seller non-compete, and the rest of your tax bill, see M&A Considerations for Founders.
How does the 280G golden parachute tax work?
Section 280G applies when your change-in-control payments, what the statute calls parachute payments, reach three times your base amount. The base amount is your average annual W-2 pay over the five years before the deal, or over the company's life if that is shorter. The equity you hold does not raise that average, so a founder on a modest salary is measured against a small number.
If your payments stay under three times base, no tax applies. If they reach it, everything above one times base becomes an excess parachute payment. Section 4999 taxes that excess at 20%, on you personally and on top of your ordinary income tax, and the company loses its deduction on the same amount. Deal lawyers call it the one-dollar cliff.
Take a founder who has paid themselves $200,000 a year for the past five years, which makes the base amount $200,000 and the three-times mark $600,000. The deal accelerates unvested equity that counts as $450,000 under the 280G rules and adds a retention bonus for staying through the closing.
Change-in-control payments | Total | Your 20% excise tax | Company's lost deduction |
$450,000 acceleration + $140,000 bonus | $590,000 | $0 | $0 |
$450,000 acceleration + $160,000 bonus | $610,000 | $82,000 | $410,000 |
Almost everything the sale pays you counts toward that total. The statute covers accelerated vesting, retention and transaction bonuses, and severance alike, because each is compensation contingent on the change in control. The total can clear three times base without any single payment looking excessive.
How do founders avoid the 280G excise tax?
A privately held company can eliminate the tax with a shareholder approval known as a cleansing vote, written into Section 280G itself. The exception applies when the company's stock was not readily tradeable on a public market before the change. Holders of more than 75% of the voting power must approve the payments, after full disclosure. With that approval, the payments stop being parachute payments and the 20% tax never attaches.
The vote needs lead time. The founders receiving the payments can't vote their own shares, so approval has to come from the other holders. Each recipient also signs a waiver first, giving up the payment entirely if the vote fails. If the vote is still being assembled in signing week, the deal either waits or the exception is lost.
The test looks only at your company's stock before the deal, so a private startup bought by a public acquirer can still use the vote. Every voting shareholder, though, sees what each insider stands to collect, and some founders would rather not put those numbers in front of the whole cap table.
Plan for 280G before the letter of intent
You can get an early read yourself by adding up what the deal would pay you and comparing it to three times your recent average pay. The exact number takes more work, because accelerated options have to be valued under the regulation's own rules and the payments only count in aggregate. On the numbers above, a $20,000 difference in one bonus separates owing nothing from owing $82,000.
A reasonable-compensation valuation carves your post-closing non-compete out of the parachute total, and the statute accepts it only on clear and convincing evidence. A cutback trims the payments to just under the threshold and costs you the difference. Between those two and the cleansing vote, which one fits depends on your cap table, how far over you are, and the time left before signing. Serotonin Legal works through it with founders.
Reach out to set up a free consultation.
Serotonin Legal advises technology founders on corporate, regulatory, and transactional matters at the intersection of AI, blockchain, and fintech. This guide is for general informational purposes and does not constitute legal advice. No attorney-client relationship is formed by reading this material.
FAQs
What is a golden parachute payment?
Golden parachute payments are compensation triggered by a change in control, like accelerated equity or a deal bonus. Under Section 280G they are counted together, and the name applies once the total to one person reaches three times that person's base amount.
Who is a disqualified individual under 280G?
The rules apply only to a disqualified individual, meaning an officer, a shareholder who owns more than 1% of the company by value, or one of the highest-paid employees. Founders typically qualify twice over, as officers and as shareholders above the 1% line. Status is tested over the twelve months ending on the date of the change in control.
How is the 280G excise tax calculated?
Start with your base amount, your average annual W-2 pay over the five years before the sale. Add up every payment the closing triggers and compare that total to three times the base. If it reaches the threshold, the excise tax equals 20% of everything above one times the base amount. The math runs person by person, so each founder and executive gets a separate answer.
Who pays the 280G excise tax?
You do, personally. Section 4999 collects the 20% from the person who receives the excess parachute payment, and where the payment runs through payroll it comes out as withholding. The company's cost is the lost deduction on the same amount.
What is a 280G cleansing vote?
A cleansing vote is the shareholder approval that exempts change-in-control payments at a privately held company from the 20% golden parachute excise tax. The approval needs more than 75% of the voting power, counted without the shares of anyone in line for the payments, and voters see the amounts first. The recipients waive the payments unless shareholders approve, and the waivers, disclosure, and vote must all finish before the change in control.
Curious to learn more about Serotonin Legal?
Get in Touch
