If you’re selling your startup and someone mentions “280G,” the short answer is this: yes, it can materially affect your payout—but only in specific, predictable situations. Most founders hear about 280G late in the process, assume it’s some abstract tax trap, and then over‑optimize the wrong things under time pressure.
Here’s the part people usually miss. 280G is not a deal‑killer rule. It’s a tax rule that reallocates economics, sometimes meaningfully, sometimes barely at all, depending on your role, your compensation history, and how the acquisition is structured. If you understand when it actually bites, you can plan around it. If you don’t, you end up negotiating blind.
This applies primarily to founders and senior executives in U.S. venture‑backed startups facing an acquisition, especially where equity acceleration is on the table. The biggest misconception is that 280G “wipes out” your proceeds. In real startup M&A, that’s rarely true, but it does quietly shift incentives in ways that matter.
Let’s walk through how this actually plays out in practice.
What 280G Is and Why It Exists (Without the Tax Lecture)
Section 280G of the Internal Revenue Code is aimed at so‑called “excess parachute payments.” In plain English, it’s designed to penalize large change‑in‑control payouts to certain executives…because that “might” be an end-run around stockholder proceeds.
Here’s the core mechanic you need to understand:
If a covered individual receives change‑in‑control payments worth more than 3× their historical “base amount” (roughly their average W‑2 compensation over the prior five years), then:
The excess portion is subject to a 20% excise tax, paid by the individual (not the company), and
The company loses its tax deduction for that excess.
What counts as a change‑in‑control payment? Cash bonuses, severance, and (crucially for startups) accelerated vesting of equity tied to the acquisition.
Who 280G Actually Applies To (And Who It Doesn’t)
280G only applies to “disqualified individuals.” In startup terms, that usually means:
Founders who are officers or meaningful shareholders
The CEO, CFO, or other named executives
Occasionally a senior hire with meaningful equity and compensation history
It does not apply to most rank‑and‑file employees, but it often can apply to early founders who took minimal compensation for years because their base amount is so low that the math easily crosses above the threshold.
***There’s also a critical carve‑out: 280G does not apply to private companies if shareholders approve the payments in advance, provided strict disclosure and voting rules are followed. This is commonly referred to as the private‑company 280G exemption, and in venture‑backed startups it’s often what is used to avoid such taxes.
The Founder Assumption That Usually Backfires
A common assumption is that shareholder approval is always the clean or available answer.
Sometimes that’s true. Sometimes it isn’t. The missing variable is timing and leverage.
Shareholder approval requires full disclosure of all parachute payments, a vote of disinterested shareholders, and enough runway to run the process correctly. In a cooperative, well‑paced deal, this is often manageable, as there are various time-based constraints and order-of-action requirements to obtain the shareholder approval exemption. In a rushed or buyer‑controlled process, it can become operationally and politically fraught.
How 280G Actually Gets Negotiated in Real M&A Deals
In practice, 280G shows up in one of three ways.
Shareholder approval. When available, this is often the cleanest path. It preserves agreed economics and avoids individual‑level excise taxes, but it only works if identified early and executed correctly.
Cutback provisions. Common, simple, and frequently misunderstood. A cutback protects the executive from the excise tax but reduces payout. Founders often accept these without fully appreciating the economic trade‑off.
Gross‑ups. Rare to the point of near extinction in venture‑backed acquisitions. They’re generally unacceptable to buyers and investors.
Thus, these solutions may not be available or and are certainly not interchangeable.
Theory vs. Reality: 280G in Practice
Theoretical discussions of 280G often treat it as something founders can either ignore entirely or strip out of the deal.
In reality, it’s neither.
What matters is alignment between founders, investors, and buyers. 280G sits at the intersection of retention, optics, and net economics. Optimizing any one of those variables in isolation often produces worse overall outcomes.
This is why experienced startup lawyers raise 280G early, not because it’s catastrophic, but because it’s easier to shape and frame earlier. In most cooperative deals, if the cap table is aligned on the transaction and the waterfall, obtaining shareholder approval is usually manageable. Earlier is better. That said, buyer counsel may not prioritize 280G at the outset, and it sometimes surfaces innocuously as a one‑line diligence request.
The Practical Takeaway
If you remember one thing, remember this: 280G (potentially) reallocates economics; but ensure it’s addressed by counsel and tax advisors.
What actually matters:
Whether you’re a covered individual
Whether payments realistically exceed the threshold
Whether shareholder approval is feasible in context
What usually doesn’t:
Worst‑case theoretical tax math
Kill your deal
Treating 280G as a moral or fairness issue rather than a mechanical one
Ryan RobertsPartner
Ryan Roberts is a startup and venture capital attorney and partner at Roberts Zimmerman PLLC with more than two decades of experience advising high‑growth startups and venture capital investors. He is the author of Acceleration: What All Entrepreneurs Must Know About Startup Law and StartupLawyer.com
