DO NOT TAKE FINANCIAL ADVICE FROM A BIG RED CAR — EVER
With that caveat, I want to urge you to investigate how deferred compensation might be a useful tool around the C Suite as part of a well-designed compensation program offering: compensation, benefits, short term incentive compensation, long term incentive compensation, and “something special.”
Deferred compensation fits into the “something special” category.
Let’s start with the basic understanding that you are a startup founder/CEO — in part, at least — for the money. Deferred compensation is a way to manage your compensation to your personal advantage within the rules as they are written.
There are two types of deferred compensation:
1. Qualified deferred compensation programs such as the 401(k); and,
2. Non-qualified deferred compensation programs which are one-off, bespoke arrangements negotiated between the founder/CEO/C Suite denizen and the company.
This bit of chatter is focused solely on non-qualified deferred compensation programs.
The founder/CEO/C Suite denizen and the company — likely operating through the compensation committee of the Board of Directors — negotiates an arrangement with the company whereby the company creates a deferred compensation account and puts money into the account for the beneficiary.
Pretty simple, no?
Not really a big deal, but the beneficiary — the founder/CEO/C Suite denizen — doesn’t have to pay income taxes on those funds until they receive them — the concept of constructive receipt.
This is tax deferral because the beneficiary has to pay taxes when they receive the funds.
Before the beneficiary receives the funds, she/he can retain the right to direct their investment. In this manner, the account is an investment account directed by the beneficiary.
There are, of course, limitations such as you cannot have a margin stock trading account, but you could have the funds in a Schwab account and buy QQQ — the tech ETF.
Ahhhh, dear reader, the risk?
At all times the funds are owned by the company and, thus, in the event of a bankruptcy the funds are at risk.
If you are trying to be clever at the margins, a way to defer some taxes, grow some wealth, and to do it painlessly might be deferred compensation. Get some advice before you do and don’t ever listen to a Big Red Car.
Have a great weekend!
