Bonus to pay option exercise cost

[sdcurt 0]

Can a company give a bonus to an employee to cover the exercise cost of a stock option or will that make it a discounted option subject to 409A provisions?

[QDROphile 265]

Is the bonus discretionary or committed contractually?

[sdcurt 0]

It is not stated in the equity plan or the award agreement but they did put that a bonus would be available in a PowerPoint presentation when they rolled out the plan.

[XTitan 27]

When you look at it objectively as a single transaction, it looked discounted. 

[EBECatty 28]

For what it's worth, this is explicitly permitted for incentive stock options, which also need a FMV exercise price. See 1.422-5(c):

(c) Additional compensation. An option does not fail to be an incentive stock option merely because the optionee has the right to receive additional compensation, in cash or property, when the option is exercised, provided such additional compensation is includible in income under section 61 or section 83. The amount of such additional compensation may be determined in any manner, including by reference to the fair market value of the stock at the time of exercise or to the option price.

[Luke Bailey 163]

sdcurt, the rule you need to be worried about is 1.409A-1(b)(5)(C), second sentence. Note that it explicitly excepts ISOs and ESPP options, so EBECatty's point is pertinent, but doesn't help if not an ISO. Uncertainty regarding whether a PowerPoint + course of dealing + emails and whatever else  = a "right" may give you wiggle room for the current transaction, but certainly whatever they are doing should be informed going forward (and, depending on facts and circumstances, maybe backward) by due consideration of the rule.