Quick facts
- Trigger: a change of control, usually plus a termination
- Tax threshold: three times the executive's base amount
- Consequence above it: 20% excise tax on the recipient
- And for the company: the deduction is denied
- Shareholder vote: advisory only, under SEC Rule 14a-21(c)
A golden parachute is a contractual package paid to senior executives when control of the company changes hands. It typically combines cash severance, accelerated equity vesting, and continued benefits.
The name is older than the tax rules that now shape it, and the tax rules are what determine how these packages are actually designed.
In plain English
An executive negotiating an employment agreement faces an obvious risk: do the job well enough that someone buys the company, and the buyer may not need you. A parachute is the answer to that risk. If the company is sold and you lose your role, you are paid.
The criticism writes itself. The people best protected during an acquisition are the ones who negotiated the acquisition.
Single trigger and double trigger
Single trigger pays out on the change of control alone, whether or not the executive loses anything. It is difficult to defend, because it pays for an event rather than a loss.
Double trigger requires two things: the change of control, and the executive being terminated without cause or resigning for good reason within a defined period afterwards. This is the version most companies use, and it is the version worth asking for.
The same distinction appears in ordinary employee equity, where vesting acceleration follows the same logic for the same reason.
The tax rules that define the shape
This is the part that explains why parachutes look the way they do.
The threshold. Section 280G applies where payments contingent on the change of control equal or exceed "3 times the base amount," the base amount being broadly the executive's average annual compensation over a preceding period.1
The company loses its deduction. Section 280G opens flatly: "No deduction shall be allowed under this chapter for any excess parachute payment."1
The executive pays a penalty tax. Section 4999 imposes "on any person who receives an excess parachute payment a tax equal to 20 percent of the amount of such payment," on top of ordinary income tax.2
Two features of this design matter. The threshold is a cliff, so a package just under three times the base amount avoids the regime entirely while a package slightly over it is penalised on the excess. And the penalty falls on both sides, which is why compensation committees model 280G exposure carefully before a deal rather than after.
Some older contracts included a gross-up, under which the company paid the executive's excise tax as well. Since the company also cannot deduct the excess, grossing up is expensive in both directions, and the practice has fallen out of favour.
The shareholder vote
When shareholders are asked to approve a merger or a sale of substantially all assets, the company must include "a separate resolution subject to shareholder advisory vote" on the change-of-control compensation disclosed under Item 402(t) of Regulation S-K.3
Note the word advisory. The governing statute is explicit that such a vote "shall not be binding on the issuer or the board of directors," and may not be construed as overruling a board decision or as changing anyone's fiduciary duties.4
So shareholders get a recorded opinion on the parachute, not a veto. A heavy against-vote is reputationally awkward and changes nothing about the payment.
The argument in favour
It is better than it first sounds. An executive with no protection has a personal financial reason to resist an acquisition that would benefit shareholders. A parachute removes that conflict, which is why boards often frame these packages as alignment rather than reward.
The counter-argument is that the alignment can overshoot. An executive who is paid well for a sale may become insufficiently interested in the price.
What this means for a founder
You are unlikely to have a formal parachute, and you may not want one. But you have the same exposure, and usually less protection than the executives you hire.
Three questions are worth answering before a sale process starts, not during one:
- Does your equity accelerate on a change of control, and is it single or double trigger?
- If the buyer terminates you three months after closing, what are you owed?
- Does anything in your arrangements approach three times your base compensation, which would pull the 280G rules into a negotiation already short of time?
The answers live in your employment agreement and your equity documents. If you have never read the change-of-control sections, they were probably drafted by someone representing the company rather than you.
Related reading
- Say-on-Pay covers the broader advisory vote on executive compensation
- Break-Up Fee covers another payment that shapes deal economics
- Poison Pill covers the defence that shares the same entrenchment critique
- Vesting Schedule covers acceleration for everyone who is not an executive