Equity & Incentive Compensation Counsel
Stock option plans, RSUs, ISOs and NSOs, restricted stock with vesting, and Section 409A-compliant deferred compensation.
Industria Business Lawyers designs and administers the equity compensation programs that align employees and contractors with company value: stock option plans with incentive and non-qualified options, restricted stock and restricted stock units, performance-based equity, and the Section 409A-compliant deferred compensation arrangements that operate alongside them.
Equity compensation is part of the company’s integrated compensation and cap-table strategy. Pool size and refresh cadence, grant practices and vesting standards, the tax classification of each instrument, and the post-employment and post-acquisition treatment of awards each shape the cap table that investors and acquirers will examine. A consultation is free.
The Equity Compensation Framework
Equity compensation uses several distinct legal instruments, each with its own tax and operational profile, layered over securities-law and transaction-tax overlays.
Incentive Stock Options
ISOs under IRC § 422 qualify for favorable tax treatment if statutory requirements are met: a shareholder-approved plan, grant to an employee (never a contractor), an exercise price at least equal to fair market value at grant, and exercise during employment or within three months after. Holders generally recognize no ordinary income at grant or exercise (though exercise can generate alternative minimum tax), and long-term capital gain is available after the statutory holding periods (two years from grant and one year from exercise). Under § 422(d), options covering more than $100,000 of stock (valued at grant) that first become exercisable in any calendar year are treated as NSOs for the excess.
Non-Qualified Stock Options
NSOs can be granted to employees, contractors, advisors, and directors. Exercise produces ordinary income equal to the spread between exercise price and fair market value, with withholding for employee holders; subsequent appreciation can qualify for long-term capital gain after a one-year hold.
Restricted Stock and RSUs
Restricted stock is actual stock issued at grant subject to vesting; RSUs are contractual rights to receive shares on vesting. Restricted stock holders can file Section 83(b) elections within 30 days after the transfer to shift appreciation into capital gain; RSU holders generally cannot. The two carry different tax, accounting, and cap-table consequences, and converting between them after grant generally requires cancellation and re-grant. Section 83(i) separately permits qualifying private-company employees to defer ordinary income on qualified equity grants for up to five years from vesting.
Section 409A
IRC § 409A governs nonqualified deferred compensation, including options granted below fair market value and certain post-vest deferral features. Noncompliance produces immediate income inclusion, a 20% additional tax, and interest penalties at the recipient level, so plan design targets the § 409A exemptions and exercise prices are supported by independent 409A valuations refreshed at least annually and after material events.
Securities-Law Overlay
Compensatory equity issuances are offerings of securities. Rule 701 provides the principal federal exemption for non-reporting issuers (subject to annual caps and disclosure thresholds), and it does not preempt state law, so state-by-state notice filings or exemption analysis are required for recipients in each state.
Transaction Overlays
Section 280G disallows the company’s deduction for “excess parachute payments” to disqualified individuals in a change of control, and § 4999 imposes a 20% excise tax on the recipient; for non-public companies, a cleansing stockholder vote under § 280G(b)(5) can eliminate the issue. FICA timing differs by instrument (none on ISO exercise, at exercise for NSOs, and generally at vesting for RSUs under the special timing rule), can diverge from income-tax timing, and is addressed at grant design.
When Equity Compensation Counsel Is Engaged
Equity compensation work recurs across the life of the company, from the first plan to the exit.
Plan adoption. Initial stock plan design and board-and-stockholder adoption, with award agreement templates for each instrument the company will use.
Ongoing grant administration. New-hire and refresh grants, board consents, cap table entries, and the 409A valuation cadence that supports exercise pricing.
Financing-round coordination. Option pool refresh, 409A re-valuation after the round, and the grant-practice cleanup that institutional diligence examines.
Executive package design. Performance-based and milestone equity, and the negotiation of equity provisions within executive employment agreements.
Pre-transaction analysis. Section 280G analysis in advance of an acquisition, including the cleansing-vote procedure where structurally available, and the treatment of outstanding awards in the transaction.
QSBS at issuance. Qualified small business stock analysis at each issuance, coordinated with the firm’s founder tax planning practice.
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What Equity Compensation Counsel Covers
Stock plan drafting and board-and-stockholder adoption, with award agreement templates for each instrument type used (ISOs, NSOs, restricted stock, RSUs).
Individual grants, including vesting schedules, post-employment treatment, change-of-control acceleration, and the supporting board consent and cap table entry.
Work with the company’s 409A valuation provider on exercise prices, grant practices, refresh cadence, and the events that trigger interim valuations.
Counsel on 83(b) elections at grant of restricted stock with vesting, and on 83(i) deferral elections for qualifying private-company grants.
Qualified small business stock analysis at issuance under the current date-of-issuance-specific framework, coordinated with the firm’s founder and individual tax planning practice.
Executive equity packages, performance-based and milestone equity, and equity provisions in executive employment agreements.
Section 280G analysis in advance of M&A transactions, including the cleansing vote procedure under § 280G(b)(5) where the company is non-public and the vote is structurally available.
FAQ
01 • Founders, Boards, and Employees What is the difference between an ISO and an NSO?
ISOs qualify for favorable federal treatment under IRC § 422 if statutory requirements are met: no ordinary income at grant or exercise (though exercise can create alternative minimum tax exposure), and long-term capital gain after the two-years-from-grant and one-year-from-exercise holding periods. ISOs can only be granted to employees; options labeled as ISOs but granted to contractors or advisors fail the requirements, with tax consequences for the recipient. NSOs produce ordinary income at exercise equal to the spread, with company withholding, and can be granted to anyone. Grants to employees are often a mix calibrated to the § 422(d) $100,000 limit on options that first become exercisable in any calendar year.
02 • Founders, Boards, and Employees Should the company grant restricted stock or RSUs?
The two instruments are not interchangeable. Restricted stock holders are stockholders from grant (subject to vesting) and can file Section 83(b) elections; RSU holders are not stockholders until settlement and generally cannot. RSUs are increasingly common in later-stage companies because they avoid the cap-table complexity of restricted stock while preserving the economic outcome. Converting between the instruments after grant generally requires a cancellation and re-grant, which carries its own tax consequences and may require board and plan approvals, so the choice is effectively made at grant.
03 • Founders, Boards, and Employees Why does Section 409A matter for equity compensation?
Options granted with exercise prices below fair market value are generally treated as nonqualified deferred compensation subject to § 409A, and RSUs with post-vest deferral features or discretionary acceleration triggers can also be implicated. Failure to comply produces immediate income inclusion of the deferred amount, a 20% additional federal tax at the recipient level, and interest penalties. The design discipline is to keep grants within the § 409A exemptions where possible, which is why private-company exercise prices are supported by independent 409A valuations refreshed at least annually and after material events such as financings.
04 • Founders, Boards, and Employees Do option grants to employees in multiple states require state securities filings?
Rule 701 provides the principal federal exemption for compensatory equity grants by non-reporting issuers, but it does not preempt state law. State-by-state notice filings or exemption analysis are therefore required for recipients in each state where the company grants equity, and that review is part of plan adoption and of grants to recipients in new states.
05 • Founders, Boards, and Employees What is a Section 83(b) election and when should it be filed?
A Section 83(b) election allows the recipient of property subject to vesting (such as restricted stock) to recognize the value as ordinary income at transfer rather than as it vests, shifting subsequent appreciation into capital gain if the holding requirements are met. The election must be filed within 30 days of the transfer; the deadline is strict, with no extension or cure. It is standard for founder stock at formation and for early-employee grants when value is low; for later grants at higher valuations, the upfront tax cost can exceed the benefit, and the analysis is grant-by-grant.
Founders, boards, and companies granting equity. Call (202) 860-1210 or describe the plan or grant through the form. Free consultation. Every plan is reviewed against the Internal Revenue Code and securities rules in force.
This page provides general information about equity and incentive compensation and does not constitute legal advice or tax advice. Reading it does not create an attorney-client relationship with Industria Business Lawyers. The tax and securities treatment of any grant depends on the facts, the plan documents, and the law in force on the grant date. Code sections and rules cited were checked against primary sources in September 2026.