IPO -- Change in Control

[Guest ppw]

Venture-backed client is putting together a cash long-term incentive plan. The basic terms they want are (1) service-based vesting over 5 years, (2) payment upon the first to occur of an IPO or a change in control, with accelerated 100% vesting if a payment event occurs before year 5. The amount of the bonuses will be based on the proceeds received in the liquidity event. CIC will be defined to meet 409A change in ownership of corporation and change in ownership of assets rules.

A few questions:

1. My understanding is that the occurrence of an IPO or CIC may be a substantial risk of forfeiture, if the possibility that these events will not occur and the employee not getting paid is substantial. My concern is that since the service-based vesting would end after 5 years, how can you get comfortable that the 409A SROF would continue until an IPO or CIC occurs (which would seem necessary in order to comply with 409A since IPO is not a permissible payment event). While there is no sale or IPO contemplated, I am not sure you can say that the risk one will not occur in the next 10, 20 etc. years is substantial.

Anyone have any thoughts on when a CIC/IPO is a valid SROF where employment is not required through closing, especially when the corp. is substantially owned by venture capital investors?

Any articles or commentary on this subject anyone is aware of?

Does this just boil down to risk tolerance -- in other words, to avoid any risk, only pay on CIC and not IPO?

2. If I can get past the first hurdle, it would seem necessary to require payment either within the short-term deferral period after the IPO/CIC or on a fixed schedule tied to the IPO/CIC. It appears that I could not use the "transaction-based compensation" payment rules on a CIC. Is this correct?

Thanks for any help that can be given.