Perhaps I'm misreading the law, but it looks like it solves the wrong problem: It addresses a cash-flow issue rather than the tax liability issue.
Say you have options at FooCorp and you leave. FooCorp is illquid and you have 90 days to exercise your 10,000 options. Your FC options have a $5 strike, but the company currently has a 409a valuation of $100/share.
To exercise the options you would need to pay $50,000 to FooCorp, then you would have a "realized gain" 950k (($100-$5)*10000 which you would owe 28% of in taxes that year, or 266k. So you would need access to $316k in total in order to exercise these options.
Two issues arise: (1) You may not have $316k just kicking around. (2) THE SHARES ARE ILLIQUID AND MAY BE WORTH $0 WHEN YOU CAN ACTUALLY DO ANYTHING WITH THEM.
The bill appears to help with (1) by letting you pay that 266k not now-- but later when the company shares become liquid or 7 years (whichever comes first). But it does nothing about (2) -- you might exercise and then the company goes bust, and seven years later you owe $266k and your current position is worth -50k... and because the taxes are AMT, you can't meaningfully write them off your losses against the taxes you owe.
This kind of failure doesn't require FooCorp to fail. You could have options at $5, execute at $100, and have things go liquid at $7-- ignoring taxes this would have been a $20k gain. But with the taxes you're still $246k in the hole.
The issue all along wasn't that someone needed extra money. The issue was the potential huge losses. If it weren't risky you could find a lender to cover the execution price and taxes in exchange for a return when the asset becomes liquid. (E.g. having to pay the $266k up front but getting it returned later when the asset becomes worthless and you write it off)
If anything this makes the situation worse by encouraging more people to commit financial suicide by making it less obviously a bad idea while being just as risky as it always was.
Say you have options at FooCorp and you leave. FooCorp is illquid and you have 90 days to exercise your 10,000 options. Your FC options have a $5 strike, but the company currently has a 409a valuation of $100/share.
To exercise the options you would need to pay $50,000 to FooCorp, then you would have a "realized gain" 950k (($100-$5)*10000 which you would owe 28% of in taxes that year, or 266k. So you would need access to $316k in total in order to exercise these options.
Two issues arise: (1) You may not have $316k just kicking around. (2) THE SHARES ARE ILLIQUID AND MAY BE WORTH $0 WHEN YOU CAN ACTUALLY DO ANYTHING WITH THEM.
The bill appears to help with (1) by letting you pay that 266k not now-- but later when the company shares become liquid or 7 years (whichever comes first). But it does nothing about (2) -- you might exercise and then the company goes bust, and seven years later you owe $266k and your current position is worth -50k... and because the taxes are AMT, you can't meaningfully write them off your losses against the taxes you owe.
This kind of failure doesn't require FooCorp to fail. You could have options at $5, execute at $100, and have things go liquid at $7-- ignoring taxes this would have been a $20k gain. But with the taxes you're still $246k in the hole.
The issue all along wasn't that someone needed extra money. The issue was the potential huge losses. If it weren't risky you could find a lender to cover the execution price and taxes in exchange for a return when the asset becomes liquid. (E.g. having to pay the $266k up front but getting it returned later when the asset becomes worthless and you write it off)
If anything this makes the situation worse by encouraging more people to commit financial suicide by making it less obviously a bad idea while being just as risky as it always was.