Contracts, Markets, and Laws in the US and Japan
Edited by Zenichi Shishido
Chapter 17: Tax law influences on the form and substance of equity compensation in the United States
This chapter summarizes recent scholarship on the influence of tax law on equity compensation in the United States. Following the scholarship, I focus on large publicly traded firms (for example, firms in Standard & Poor’s 500), firms in the venture capital (VC) industry, including both VC firms and the start-up firms they finance, and firms in the private equity industry more generally. Success in these firms generally requires inducing individuals who are thought to have rare managerial or other talents to take risks, and to fully devote themselves, in a speculative enterprise that requires enormous amounts of other people’s capital. This is done by giving them equity compensation in the form of stock, options, or a partnership profits interest. There is little evidence or reason to believe that tax law significantly influences the substance of equity compensation in a strong systematic way. By substance I mean the mix between equity and cash compensation and the risk and term structure of equity compensation. This is particularly true with regards to publicly traded firms for tax law generally is roughly neutral in the choice between equity and cash compensation and in the structuring of equity compensation once costs and benefits to both the firm and the recipient are considered. Tax law probably also has not had much impact on the form of equity compensation in publicly traded firms.
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