280G Valuation Basics

The 280G valuation process is an evaluation conducted in the event of a sale or any change of control of the business organization. The main objective of such an evaluation is to determine whether the payments resulting from the transaction amount to “golden parachutes” and, therefore, constitute excess parachute payments.

In practice, the objective of the process is to determine whether such payments will cause the corporate deductions to be disallowed under IRC Section 280G and to incur the 20% excise tax under IRC Section 4999.

Why Does 280G Matter?

Section 280G is important because it affects not only the net amount the executive ends up with after paying taxes but also the amount the firm can deduct when the transaction occurs.
If the change in control involves very large amounts relative to prior compensation, these amounts may be referred to as “excess parachute payments”.

Impact on the executive

This means that an additional 20% excise tax is levied on the parachute payment amount, in addition to other taxes such as normal income tax and payroll taxes.

Impact on the company

The company cannot claim any tax benefit due to the excess parachute payment, which increases its taxable income and reduces the after-tax proceeds from the deal.

Impact on Transaction

Since the total effect of the tax is significant enough to affect the valuation, purchase price allocation, and net proceeds of the deal, buyers and sellers almost always consider 280G in the M&A process.

Who is Subject to 280G? (Disqualified Individuals)

The provisions of Section 280G do not cover every individual who is a worker in a given transaction; they only cover certain individuals known as “disqualified individuals”.

Under the rules, disqualified individuals generally include three categories:

• Officers of the corporation are determined under a facts‑and‑circumstances test rather than by job title alone.
• Shareholders who own at least 1% of the fair market value of the company’s outstanding stock and who also provide services to the company (for example, founder‑shareholders who are executives or key employees).
• Highly compensated individuals are typically drawn from the group of highest‑paid employees using objective compensation thresholds and rankings.

When Does 280G Apply?

280G analysis is required when there may be a shift in the company’s ownership and control, and when senior executives have compensation contingent on that event. It is considered normal for any major transaction to undergo golden parachute analysis.

Common triggering situations include:

Sale of the company	A full or majority sale resulting in a change of control, especially when senior executives have severance, bonus, or equity-acceleration provisions linked to closing
Merger	A combination changing effective control of the surviving entity and triggering CIC rights for officers, founders, or highly compensated employees
Recapitalization	Significant restructuring transactions that shift voting power or economic ownership enough to qualify as a change in control under the 280G rules
Private equity acquisition	PE buyouts where target-company executives often hold sizable equity and negotiated exit packages that may create parachute payments
IPO preceded by a CIC event	An IPO following or combined with a restructuring can bring 280G into play, especially if executives receive pre-IPO liquidity, special bonuses, or equity accelerations
Significant equity acceleration	Any transaction where senior leaders have large stock-option, RSU, or restricted-stock positions that accelerate or are cashed out on closing, because equity can push packages over the 3× cliff even when cash severance is modest

What Payments Are Included?

A parachute payment under section 280G is any payment that constitutes an arrangement that depends on a change in the corporation’s ownership or control and has the form of compensation payable to the disqualified person. Indeed, almost any payment in connection with the business transaction may be included in this test if it adds value to the amount of the executive’s income.

Cash payments

These often form the most visible part of parachute packages:

• Transaction bonuses tied directly to deal signing or closing, including success‑based M&A bonuses.
• Stay bonuses, or retention bonuses, are designed to keep key executives in place through the closing or integration period.
• Severance payments triggered by termination or constructive termination in connection with the change in control.

Equity compensation

Change‑in‑control provisions in equity plans can create significant parachute value:

• Accelerated stock options, where unvested options vest or become exercisable because of the transaction, with the in‑the‑money value treated as compensation.
• RSUs (restricted stock units) that vest or are settled upon closing, converting into shares or cash that would not have been received absent the deal.
• Restricted stock and other full‑value awards whose vesting is accelerated or values are cashed out at the transaction price.

Benefits and side arrangements

Non‑cash benefits can also constitute parachute payments if they are contingent on the change in control:

• Continued health coverage or welfare benefits provided for a period after the transaction beyond the standard policy.
• Consulting agreements entered into in connection with the deal that provide post‑closing compensation tied to the transaction’s completion.
• Non‑compete payments or other restrictive‑covenant payments negotiated as part of the sale and conditioned on a change in control.

Change‑in‑control provisions in contracts

Existing agreements often embed contingent rights that become relevant in a 280G analysis:

• Employment agreement payouts such as lump‑sum severance, bonus acceleration, or benefit continuation triggered by a defined change‑in‑control event.
• Gross‑up provisions that reimburse executives for the Section 4999 excise tax; these tax gross‑ups themselves are treated as additional parachute payments and can increase excess amounts.

Why Is a 280G Valuation Performed?

The purpose of a 280G valuation is to determine which of the payments made can rightfully be regarded as payments for future services. This will ensure that parachute payments do not exceed and that no taxes under 280G/4999 apply when unnecessary. There are some exclusions from the parachute payment total value that can be claimed.

Common categories include:

Categories	Requirements
Post-closing employment	Executive has a real post-transaction role and market-level pay
Consulting agreements	Defined services, hours, and fees aligned to typical consulting rates
Non-compete covenants	The restriction has genuine economic value, and the payment matches what the market would pay for comparable covenants

Such exclusions are supposed to be based on evidence and market comparisons, and hence firms conduct a 280G valuation that allows them to estimate what part of the executive package is deemed to be appropriate future compensation and not a parachute payment.

What Does a 280G Valuation Firm Actually Do?

A 280G valuation firm’s task is to convert legal rules into precise numbers that boards, buyers, and management can use in the deal. In practice, the specialist follows a structured process to identify which executives fall under 280G, how large their parachute payments are, and how much can be treated as reasonable compensation.

Step 1 – Identify disqualified individuals

The company begins by identifying those who qualify as 280G-disqualified individuals, generally including the CEO, CFO, founding members with significant equity, and other key management personnel who meet the regulatory qualifications.

Step 2 – Calculate each person’s base amount

The specialist calculates the base amount for each disqualified employee by averaging five years of taxable income, typically based on W-2 forms and similar documentation, resulting in the determination of the 1x base amount and 3x threshold.

Step 3 – Inventory all transaction‑related payments

Second, the company prepares an itemized list of all payments related to the transaction, which may include bonuses, vesting/acceleration of equity, cash severance, change-in-control pay, enhanced benefits, and, in some cases, earnouts.

Step 4 – Determine the parachute value

Based on the inventory, the specialist can determine the parachute’s value using the rule that accounts for changes in control and discounts future payments to their present value, rather than merely totaling the nominal amounts.

Step 5 – Perform a “reasonable compensation” study

To minimize exposure to parachutes wherever necessary, the corporation conducts a fair compensation review, considering similar compensation paid to executives in the industry, the size of the corporation, and the individual’s potential future duties, to determine how much can be treated as true compensation for continued employment.

Step 6 – Model Planning Scenarios

Finally, the specialist models different planning options and presents them in scenario form so boards and executives can choose the most efficient structure.

Scenario	Result
No adjustment	3.4× base amount
Cutback of contingent pay	2.99×
Future services valuation	2.8×
Shareholder vote	No tax exposure

The above examples show how small adjustments, such as reducing payments or transferring funds to secure future services with a strong basis for success, could bring the executive into a safe range below the 3× ratio.

Common Strategies to Avoid 280G Taxes

Businesses and individuals rarely take 280G exposure at face value; instead, they typically use one or more common strategies to deal with the excise‑tax and deduction‑forfeiture problem.

Strategy 1 – Cutback

A cutback provision reduces parachute payments to a level just under the 3× base amount threshold so that no amounts are treated as parachute payments at all. In practice, that might mean trimming a package from, say, 3.05× down to 2.99× of the base amount, which keeps the executive out of 280G entirely, no excess parachute payment, no 20% excise tax, and no nondeductible compensation. This approach is very common in modern change‑in‑control agreements because it is simple to implement and does not require shareholder action.

Strategy 2 – Reasonable Compensation Opinion

A reasonable compensation opinion is used to support that part of the apparent parachute package is actually pay for future services and therefore can be excluded from parachute calculations. Independent valuation or compensation consulting firms typically prepare these opinions, benchmarking the executive’s post‑transaction role against comparable positions, pay levels, and responsibilities. When well supported, this can reduce the computed parachute multiple enough to fall below 3× or at least shrink the excess parachute amount.

Strategy 3 – Private Company Shareholder Approval (“280G Vote”)

For many privately held corporations, a shareholder‑approval process often called a “280G vote” offers a powerful mitigation tool.

Requirements

• At least 75% of disinterested shareholders (those not receiving parachute payments) approve the arrangements, and
• The parachute payments and their consequences are properly disclosed in advance.

When both conditions are met, the 280G excise tax and loss of deduction can be avoided for those payments. This shareholder‑approval exemption is a private‑company feature and is not available to public companies, which must rely instead on cutbacks and reasonable compensation planning.

Deliverables in a Typical 280G Engagement

The usual outcome of a 280G engagement is a report that will assist transaction counsel, boards of directors, auditors, and possible purchasers in evaluating the risk posed by golden parachutes.

Typical deliverables include:

Deliverables	Description
Executive roster & disqualified-individual analysis	Clear listing of executives, founders, and key employees with determination of who qualifies as a disqualified individual under the 280G rules
Five-year base amount calculations	Detailed calculations using five years of W-2 or comparable taxable compensation data, with supporting schedules
Parachute payment inventory	Comprehensive inventory of all transaction-related compensation and benefits that may constitute parachute payments, categorized by cash, equity, and benefits
Present value calculations	Discounting of future or deferred payments back to present value using prescribed methods and rates
Equity acceleration valuation	Valuation of accelerated stock options, RSUs, restricted stock, and other awards triggered or modified by the change in control
Reasonable compensation analysis	A study that allocates part of the package to reasonable compensation for future services or enforceable non-competes, with narrative and quantitative support
Comparable compensation support	Benchmark data showing how the executive's future compensation compares to similar roles in comparable companies by size, industry, and complexity
Cutback scenarios	Modeled alternatives showing the impact of cutback provisions or negotiated reductions on parachute multiples and excess-payment amounts
Shareholder vote analysis	For private companies, analysis of whether a 280G shareholder-approval process is available, practical, and sufficient to eliminate tax exposure
Final opinion/report	A consolidated report or opinion letter summarizing methodology, findings, and recommended actions, formatted so that legal counsel and auditors can integrate it into deal documentation and financial reporting

FAQs

The questions below address the most common points of confusion founders encounter when exploring secondary liquidity for the first time

When should a company start thinking about 280G in an M&A process?

A company should start considering 280G as soon as it begins structuring executive severance, transaction bonuses, or equity acceleration tied to a potential change in control. Addressing it early keeps options such as cutbacks or shareholder approval available, rather than trying to fix exposure at the definitive agreement stage.

Does 280G apply only to cash severance, or can earnouts and special bonuses be pulled into the analysis?

280G can cover more than cash severance; earnouts, retention pools, and special bonuses may be parachute payments if they operate as compensation tied to the change in control. Whether they are included depends on how they are structured and described in the deal and compensation documents.

How do private equity buyers typically approach 280G issues in portfolio company deals?

Private equity buyers usually raise 280G early in the diligence process for executives with significant equity stakes or exit packages to protect deal value. They often use cutback clauses, independent reasonable‑compensation opinions, and, when possible, a 280G shareholder vote to manage exposure and align economics with management.

Can 280G issues arise even if no one is terminated at closing?

Yes. 280G can apply even when executives stay, because it covers payments triggered by the change in control itself, such as single‑trigger equity vesting or special transaction bonuses. In equity‑heavy deals, these payouts can still cross the 3× threshold and create excise tax and nondeductible compensation.

​How do auditors typically look at 280G reports in the context of financial reporting?

Auditors assess whether 280G assumptions and calculations are well‑supported, consistent, and clearly disclosed. They look for robust documentation of base amounts, present‑value methods, and any reasonable‑compensation adjustments, often expecting independent valuation or compensation studies to back key positions.

Is it ever better to “accept” 280G taxes rather than restructure executive packages?

Sometimes yes. When timing is tight or executive negotiations are fragile, boards may decide the cost of 280G taxes is preferable to cutting back key leaders’ payouts. In those cases, the 280G valuation helps quantify the trade‑off so investors and executives understand the impact clearly.

How Eqvista Helps You Stay Ahead of 280G Risk

280G risk is easiest to manage when executive payouts, equity awards, and severance terms are modeled well before a deal is signed. That requires accurate, organized, and real-time data on cap tables, equity grants, vesting schedules, and compensation structures, exactly what Eqvista is built to provide.

Whether your company is approaching an M&A transaction, a private equity investment, a recapitalization, or any other liquidity event, the time to understand your 280G position is now, not after the term sheet is signed.

Are you working on a deal? Our team can quickly review your 280G exposure and connect you with the right valuation and tax experts to help protect your transaction. Schedule a free consultation with Eqvista now!