So you finally landed that coveted job at a hot Israeli startup.
Not only is the salary great, they're also giving you stock options, so you can make it big along with the company when the big day arrives.
Not so fast.
If you're a US citizen/green card holder, you need to make sure the company is 409A compliant before accepting these options.
409A is a section of the U.S. tax law that contains rules about the stock options some companies give their employees. Basically, a 409A valuation is the assessment of the fair market value of your company’s shares.
This law was enacted after the Enron debacle, where the company overvalued it's share price in order to enrich it's executives.
The law requires all private US companies (such as startups) to have an independent appraisal of the fair market value (FMV) of a private company's common stock on the date of issuance. This ensures that companies aren't overvalued for fraudulent purposes.
This independent valuation needs to be done once every 12 months. Once the valuation is performed the company has reached "safe harbor" status.
Not only is a company exposed to penalties if it is not performed, a 409A valuation also helps protect employees from future tax problems with the IRS.
If the IRS determines that stock was undervalued at the time it was offered to the employee, the IRS will require employees to immediately pay the income tax on the difference between the current value of the stock and the undervalued stock price – even if the employee has yet to exercise their options to purchase the shares.
On top of that the employee will be required to pay a penalty equal to 20 percent of the price difference – and on top of that likely charge interest on the tax bill.
So why do you need your non-American employer to be compliant, if they aren't normally subject to US regulations?
They actually are required by US law to comply with the 409A if they will be issuing options to US taxpayers.
Not only that, but if the company is overvalued, then the US taxpayer employee will end up misreporting income on their tax return - regardless of whether the company is subject to US regulations or not.
Since you as a US citizen must report all worldwide income, you need to know how much income you actually received during the year. Without a 409A valuation, the IRS can contest the value you report to them, and you can be subject to paying the difference in price, and large penalties.
Before accepting a job, it would be prudent to ensure that the non-US company is actually compliant, if you want to actually be able to receive stock options.
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