By Joe Wallin
What this post covers: Section 280G ("golden parachute") taxes are triggered when compensation connected to a change of control (cash, accelerated vesting, retention bonuses) exceeds three times your base amount — your average taxable compensation over the prior five years. Founders usually have low salaries, which makes their base amount small and the tax trap easier to trigger.
Top takeaways:
- Plan early: Engage tax counsel before your deal to review founder share vesting, options, RSUs and bonuses.
- Know your base amount: Low salaries mean a small base amount, so the 3× threshold is reached quickly.
- Check your documents: Review transaction agreements for any representations about excess parachute payments; breaches can have consequences.
- Consider restructuring or exceptions: Explore whether the company qualifies for exceptions or whether your deal can be structured to avoid the 280G excise tax.
You’re a startup founder. You and your co‑founders have poured years into building something meaningful—and now, at last, you’ve landed a successful exit. Time to bask. But hang on: your deal has just kicked open the door to one of the nastiest tax surprises in the M&A world.
You walk into your lawyer’s office, confident. And then you hear:
“Your salary over these past several years was unusually low.”
“That’s a problem — it means your ‘base amount’ is small.”
“You’re going to pay penalty taxes unless you act fast.”
You blink, you breathe, you ask: What on earth is he talking about?
Your lawyer replies:
“It’s Section 280G of the Internal Revenue Code. If you receive payments—cash, accelerated vesting, retention bonuses—connected to the change in corporate control, and the aggregate value is three times your base amount (your average taxable compensation over the prior 5 years), then the excess becomes an ‘excess parachute payment.’”
“You’ll owe a 20% excise tax (under §4999) and the corporation loses the deduction.”
Here’s the kicker: Even if you’re getting only stock consideration, or you haven’t had a big salary in years, the vesting of founder shares, acceleration on a sale event, or a bonus can trigger this tax. It’s not just the big cash payouts. If your unvested shares accelerate and count as compensation, you’re in the zone.
The Technical Details (Yes, we have to…)
- §4999 imposes a 20% excise tax on a person who receives an “excess parachute payment.”
- “Base amount” = the individual’s average taxable compensation from the corporation for the 5 years prior (excluding the year of the transaction).
- “Parachute payment” = compensation‑type payments contingent on a change in control if the aggregate value is at least 3× the base amount.
- Payments count as “in the nature of compensation” if they stem from services rendered—e.g., employment relationships, vested share awards, accelerated option or RSU grants.
So: if you were working for low pay, accumulating founder shares that vest over time, and a sale event accelerates some of that vesting—boom—you can fall into the 280G trap.
What Can Founders Do?
- Get tax counsel early, while your deal is being structured. Don’t wait until the 11th hour.
- Examine all compensation and equity arrangements: unvested founder shares, option/RSU awards, bonuses—all need review.
- Check whether your transaction agreement contains any representation or indemnification that excess parachute payments won’t be made. If you violate that, the buyer might have a claim.
- Explore whether your company qualifies for exceptions (for example, S‑corporations or partnerships are outside scope) and evaluate whether the deal structure could be modified to avoid the excess‑payment regime.
Big Picture: Why this matters
The law, as currently drafted, is often harsh and hits founders harder than other executives. Startups typically compensate founders with low salary + equity incentives—not the large salary/bonus mix that traditional executives have. That structure makes the 3× base‑amount threshold relatively low, and so the “parachute” threshold can be easier to hit.
From a policy/structural standpoint: the law is complex, it creates extra transaction friction, and arguably mis‑targets entrepreneurial founders. One could argue that Congress should consider an exemption threshold (e.g., companies under X in assets or revenue) or simplify the regime for early‑stage founders.
