Updated September 10, 2026
Acquisition bonuses, accelerated vesting and other compensation can trigger the golden-parachute rules. Section 4999 imposes a 20% excise tax on excess parachute payments; Section 280G denies the associated deduction. Neither consequence follows automatically from an acquisition or an equity acceleration.
Founders with a low historical compensation base and substantial transaction-related compensation can face significant exposure. The analysis depends on the recipient, corporation, payment terms, valuation and available exceptions.
These rules can apply to founders, other employees and independent contractors who meet the disqualified-individual tests. Founder status is neither required nor sufficient by itself. For other ownership and departure issues, see the Founder Issues guide.
What Is Section 280G?
1. Establish the base amount. Generally, this is average annual compensation includible in gross income for services to the relevant corporation and specified related or predecessor entities during the base period. It can include taxable bonuses and equity compensation, not just salary. The period generally covers the five taxable years preceding the change year; shorter service histories and annualization require special rules. See Q&A-34 through Q&A-36.
2. Test aggregate present value. Identify compensation contingent on a qualifying change in ownership or control, value it under the rules and apply exemptions. The threshold is met when the included payments’ aggregate present value equals or exceeds three times the base amount. Exactly three times is enough.
3. Calculate excess parachute payments. Once the threshold is met, allocate the base amount among parachute payments under the regulation and apply any permitted reasonable-compensation reduction. The excise tax is 20% of the resulting excess. It is not limited to payments above the three-times threshold. Timing and multiple payments can require more than simple subtraction.
The Math: A Practical Example
Assume a disqualified founder receives one $600,000 cash bonus at closing, entirely contingent on a qualifying change in control. The properly calculated base amount is $150,000. No other payments, exemptions, reasonable-compensation reductions or gross-up apply.
- Base amount: $150,000.
- Three-times threshold: $450,000.
- Closing bonus and present value: $600,000; the threshold is met.
- Excess parachute payment: $600,000 − $150,000 = $450,000.
- Section 4999 excise tax: 20% × $450,000 = $90,000.
The excise tax in this example is $90,000. Ordinary income tax and applicable payroll and state taxes are separate. The company’s Section 280G deduction disallowance is $450,000, not the full $600,000 payment.
This is a cash-bonus illustration. It does not assume that the face value of restricted stock, options or RSUs is the amount included in a Section 280G calculation. Equity acceleration requires its own valuation.
What Counts as a Parachute Payment
A disqualified individual generally must perform services and meet an officer, shareholder or highly compensated individual test during the applicable determination period. The shareholder rule generally uses more than 1% of stock value, with attribution and other rules. Review the regulatory definitions and limits rather than using job titles or founder status alone. See Q&A-15 through Q&A-20. Potential payment categories include:
- Accelerated equity. Q&A-24 can permit partial-value treatment for qualifying service-based vesting acceleration, using a timing benefit and prescribed service-lapse amount, subject to a cap. Unmet performance conditions can instead result in full-value inclusion. Apply the valuation rules; do not substitute face value as a universal shortcut.
- Closing bonuses. Review whether the payment is contingent on the change and whether an exception applies.
- Retention or consulting compensation. Separate payment for closing from genuine post-closing services and substantiate any reasonable-compensation exclusion.
- Non-compete and non-solicitation payments. Review the actual covenant and supporting valuation; the label alone does not settle treatment.
- Salary continuation and severance. Examine the agreement, contingency, timing and any applicable exclusion.
Classify and value each payment, then aggregate the nonexempt amounts. A transaction-related label is a reason to investigate, not a substitute for the statutory tests.
Reasonable compensation for post-change services can be excluded when established by clear and convincing evidence. Compensation for pre-change services follows different reduction rules. A consulting or restrictive-covenant label does not establish an exclusion; actual services, enforceability, value and evidence matter. See Section 280G(b)(4) and Q&A-9 and Q&A-39 through Q&A-44 of the regulation.
The Double Penalty: Excise Tax Plus Lost Deduction
Section 280G does not deny every deduction for every dollar paid at closing. Determine the excess amount and apply the ordinary deduction rules separately to any remaining compensation.
The practical cost of losing a deduction depends on which entity would claim it, that entity’s tax position and the transaction structure. The disallowance does not itself impose a separate corporate excise tax or establish that an acquirer automatically owes tax on the payment.
Why This Hits Founders Especially Hard
A lower compensation base can make it easier to cross the three-times threshold. But the base is not limited to W-2 salary: includible bonuses, option-exercise compensation and other qualifying amounts can matter. Unrecognized appreciation in founder shares is different from compensation already included in gross income.
For a single $1 million closing-contingent cash bonus, a $1 million base amount puts the payment below the three-times threshold; a $200,000 base amount produces a $160,000 excise tax. Both cases assume a disqualified individual and no other payments, exemptions or reasonable-compensation reductions. The final example shows the lower-base calculation and the effect of a qualifying shareholder vote. Compensation from an unrelated prior employer does not simply become part of the base amount.
The Shareholder Approval Exemption
Section 280G(b)(5) contains corporate exceptions that must be checked before assuming a vote is necessary. One covers corporations meeting the specified small-business-corporation eligibility test, whether or not an S election is in effect. A separate exception permits qualifying shareholder approval for certain corporations without readily tradeable stock.
For the shareholder-approval route, the company must satisfy the eligibility, waiver, disclosure and voting conditions. A qualifying vote removes the approved payments from parachute-payment treatment. Their ordinary income-tax character and deductibility under other rules remain separate questions.
This is called the "280G vote" or "Section 280G waiver vote."
How the 280G vote works:
- Confirm the corporation qualifies and identify the payments submitted for approval. Plan early; the statute does not impose a general requirement to complete the process before signing the acquisition agreement.
- Obtain an effective waiver so the vote genuinely determines the right to receive or retain the submitted payments. The vote can cover less than the full payment package.
- Provide full, truthful disclosure of all material payment facts to every shareholder entitled to vote.
- Obtain a separate approval of the payments by more than 75% of the eligible outstanding voting power under Q&A-7, applying disqualified-holder exclusions, attribution and entity-shareholder rules. Exactly 75% is insufficient.
- Complete the qualifying approval before the change in control. Approval of the acquisition must not be conditioned on approval of the parachute payments; an advisory vote alone does not qualify.
A public-company advisory vote is not this exception. Closely held status alone also is insufficient: indirect publicly traded ownership and entity-shareholder rules can affect eligibility and voting. Review Q&A-6 and Q&A-7 for the actual ownership structure.
If a required waiver makes payment contingent on approval and approval fails, the waived payment cannot simply be paid anyway while claiming the exception.
Cutbacks, Gross-Ups, and Other Planning Options
If a 280G vote is not possible (or fails), consider these contractual and planning options. Cutbacks and best-net clauses can reduce or avoid the excise tax depending on how they operate. Gross-ups shift tax cost to the payer and can increase the overall tax bill rather than reduce 280G exposure:
1. Cutback provisions. A mandatory cutback reduces covered payments below the threshold as the contract directs. This avoids the excise tax only if the calculation and reductions work under the tax rules. A mandatory cutback is not necessarily the recipient’s best after-tax result.
Specify which payments are reduced, their order, the calculation assumptions and how later adjustments are handled. Review other applicable tax rules before changing payment timing.
2. Gross-up provisions. A gross-up shifts an agreed tax cost to the payer. The added payment can itself create income and excise tax, requiring a calculation that accounts for tax on the gross-up. Simply adding 20% does not necessarily make the recipient whole.
Gross-ups increase the payer’s cost and depend on negotiated terms. They do not create a statutory exemption.
3. Best-net provisions. These generally compare full payments after applicable taxes with reduced payments below the parachute threshold, then provide the better result under the clause. They are not defined by comparing the transaction with and without a shareholder vote. Read the actual provision and its assumptions.
4. Timing and restructuring. Delaying a payment or changing cash into equity does not automatically remove change-in-control contingency. Review present value, the underlying right, reasonable compensation, anti-avoidance provisions and any Section 409A restrictions before amending terms.
Key Dates and Planning Checklist
As early as practical, ideally before deal terms are fixed:
- Identify disqualified individuals and the applicable service histories.
- Calculate base amounts using includible compensation and any shorter-period or annualization rules.
- Inventory cash, equity, severance and other potentially contingent payments; obtain appropriate valuations.
- Test the threshold and corporate exceptions before estimating excise tax.
During acquisition negotiations:
- Share the analysis with transaction and tax counsel and identify the entity affected by deduction disallowance.
- If using shareholder approval, prepare the waiver, disclosures and eligible voting calculation before closing.
- Compare the actual cutback, best-net or gross-up terms.
- Update the calculation if compensation, equity value or transaction terms change.
Post-closing:
- Determine employee or nonemployee reporting and any applicable withholding under the current IRS instructions.
- Reconcile payments, withholding and the recipient’s excise-tax reporting; do not report the same tax twice.
- Retain valuation work, base-period records, waivers, disclosures, vote evidence and final payment calculations.
A $50 Million Exit: Stock Proceeds, Bonus and Shareholder Vote
An acquisition price does not itself determine the Section 280G base. Separate bona fide stock-sale proceeds from compensation. Any QSBS treatment of stock gain requires a separate analysis; it does not exclude a cash employment bonus.
Assume a $50 million software-company acquisition. Under the negotiated capital structure and deal terms, the founder receives $20 million for fully vested shares; that purchase price is bona fide stock consideration, not disguised compensation. The founder also receives a separate $1 million closing bonus.
Additional assumptions:
- The founder is a disqualified individual; the properly calculated base amount is $200,000.
- The $1 million cash bonus is paid at closing and is fully contingent on the change in control.
- There are no other included payments, reasonable-compensation reductions or gross-ups.
- Absent the vote scenario below, no corporate exception applies.
- For income-tax illustration only, assume other taxable income puts the entire bonus in the 37% federal bracket. This is an assumption, not a rate established by the bonus alone.
Without a corporate exception or qualifying vote:
- Threshold: 3 × $200,000 = $600,000; the $1 million bonus crosses it.
- Excess parachute payment: $1,000,000 − $200,000 = $800,000.
- Excise tax: $160,000.
- Assumed ordinary federal income tax on the bonus: $370,000.
- Combined modeled federal taxes: $530,000; bonus net of those taxes: $470,000.
With a qualifying shareholder-approval exception covering the bonus:
- Section 4999 excise tax on the covered bonus: $0.
- Assumed ordinary federal income tax on the bonus: $370,000.
- Bonus net of modeled federal income tax: $630,000.
- Difference from the no-exception case: $160,000.
The modeled vote savings are $160,000 on the bonus. Taxes on the separate stock sale, payroll taxes, state taxes and other deductions or limitations are outside this illustration. The vote does not make the $20 million stock sale tax-free or establish the founder’s QSBS eligibility.
Key Takeaways
Sections 280G and 4999 require a recipient-by-recipient analysis of compensation connected to a qualifying change in control. Calculate the base amount, value payments under the applicable rules, check exceptions, then determine excess parachute payments and the 20% excise tax.
Run the 280G analysis during negotiations, while payment terms can still be changed. I work with founders and companies nationwide on §280G analysis, shareholder-approval votes, and deal structuring. Book a 20-minute call.
This post is for informational purposes only and does not constitute legal or tax advice. Consult with a qualified tax professional regarding your specific circumstances.
Keep Reading
- Equity Compensation Plan Design: How to Structure Your Startup's Stock Option Plan
- ISO vs. NSO: The Complete Guide to Incentive Stock Options and Nonqualified Stock Options
- Founder Vesting Schedules: Why Every Co-Founder Needs One and How to Get It Right
- 409A Valuation: The Complete Guide for Startup Founders (2026)
