Equity awards often represent the largest component of change-in-control compensation, yet they are also the most complex to evaluate. When a deal triggers early vesting or modifies performance criteria, those awards can quickly transform into parachute payments under Section 280G. Understanding how to value that acceleration is essential for maintaining compliance and fairness.
The Mechanics of Time-Based Awards
The IRS outlines a specific framework for valuing accelerated vesting. The parachute value equals the sum of:
(A) The number of full months of acceleration multiplied by one percent of the total award value, and
(B) The present-value difference between accelerated and scheduled vesting dates, discounted at 120 percent of the applicable federal rate (AFR) and compounded semi-annually.
Example
An executive holds 10,000 RSUs valued at $50 per share. If vesting accelerates five months due to a change in control and the AFR is 5 percent:
- (A) = 5 months × 1 percent × $500,000 = $25,000
- (B) = $10,000 present-value difference
- Total parachute value = $35,000
That $35,000 becomes part of the overall parachute payment subject to 280G limits.
Performance Awards Require Judgment
Performance stock units and similar awards add another dimension. Whether their value counts as a parachute payment depends on the connection between performance and the transaction itself.
- If the goals are met regardless of the change in control, the value is generally not contingent.
- If the transaction accelerates vesting or alters targets, the affected portion becomes part of the parachute total.
Evaluating these situations requires modeling the likelihood of goal achievement, the portion of performance periods completed, and any board discretion or plan modification.
Consistency Is Key
The greatest challenge in 280G equity analysis is not performing the calculations but ensuring that every stakeholder uses the same assumptions. Stock price, volatility, discount rates, and performance probabilities must all align across tax, legal, and compensation teams. When those variables are synchronized and documented, results become defensible and ready for audit.
Closing Thoughts
Equity acceleration sits at the intersection of valuation, compensation design, and tax regulation. Precision and consistency transform what could be a compliance risk into a demonstration of governance and control.
Contact us to learn how accurate modeling of equity awards can enhance confidence in your next transaction.
FAQs
Q1: How is accelerated equity valued under 280G?
The IRS formula combines one percent per full month of acceleration and a present-value adjustment based on the applicable federal rate (AFR).
Q2: Do performance-based awards count as parachute payments?
They do if the change in control alters vesting conditions or accelerates payout timing tied to performance goals.
Q3: What discount rate is used in 280G equity modeling?
The discount rate equals 120 percent of the applicable federal rate (AFR), compounded semi-annually, as defined in IRC §1274(d).
Q4: Why is consistency important in 280G analysis?
Consistency across legal, tax, and compensation teams ensures calculations are defensible and align with auditor and regulatory expectations.
