3. Tax Trouble 2 – if the benefit is a restricted stock grant, it may generate an unwanted tax burden for the employee when the stock vests. I know of situations where a stock unit vested, generated a sizeable taxable gain, and then the value of the stock plummeted. The employee ended up paying more in income taxes than the value of his shares.

4. Tax Trouble 3 – if an employer provides a stock option, and applies an incorrect valuation, the whole transaction can fall under the draconian penalties of IRC 409A. Here's the scenario: An employer issues a stock option, making a best effort attempt at assigning a value for the untraded stock. If the IRS finds the value to be higher than that declared by the company, the IRS will claim the stock option was issued at a discount. This could lead to immediate taxation, plus interest, plus a 20% penalty, all landing on the executive.

5. Accounting – a stock option is tempting until one realizes that the company must currently book the value of the option. Particularly with a privately held company, valuing a stock option can be both expensive, and a complete guess.

6. Employee Disenchantment 1 – Twice I've had non-owner CFOs complain to me that their business's owner is short changing them by rewarding them with small stock grants. Said one CFO "the owner uses the business as a personal checkbook, so I have no control over what that stock will really be worth."

7. Employee Disenchantment 2 – the employee has a stock option that is in the money. But, to exercise the stock option, the employee needs cash. In a period of tight credit, this credit isn't always forthcoming.

8. Owner disenchantment 1- the owner now has a new critic. If the employee becomes a stockholder, he or she is also privy to the company financials. I'm aware of an engineering firm where the employer is desperately trying to buy back all the stock from the employees. The engineers' penchant for detail is causing the employer to respond to constant inquiries, complaints and challenges.

9. Owner disenchantment 2 – if the owner wants to sell the business to an outside buyer, the small amounts of stock scattered among the employees can cause a serious impediment to transacting the sale.  The majority shareholder has lost the privacy of a negotiated sale, has increased legal expenses, and may scare off the seller. Some buy-sell agreements mitigate this risk by including a "drag-along" feature which gives a majority owner the right to force minority owners if the majority owner decides to sell.

10. No one wants a "lose/lose" benefit – With many privately held businesses, there is no upside to granting stock. If the stock does not increase in value, the employee is not only unmotivated, but possibly upset. If the stock value goes up, the owner is giving up valuable equity, and the employee may not appreciate the true value of that hard earned equity. Whether the value goes up, down, or stays the same, the owner has to explain it, defend it, and justify it to the employees.

While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is intended to provide general information about the subject matter covered and is provided with the understanding that the author is not rendering legal, accounting, or tax advice. It is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.