7.1.12: Convertible Debt Plans

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Abstract

Under the typical plan, an executive is offered a subordinated debenture which, after a fixed number of years of employment (or death or disability), becomes convertible at the executive's option into common stock. The issuer loans[1] the executive the amount necessary to purchase the debenture. Provided the conversion price is at least equal to or greater than the fair market value of the conversion shares at time of purchase and the interest rate on the loan to the executive is competitive,[2] the thinking is, at least currently, that the executive will not realize compensation income. Postponed vesting (if any) of the conversion privilege is not considered a substantial risk of forfeiture, and, consequently, no § 83(b) election is required unless the debentures themselves are subject to a substantial risk of forfeiture. The executive recognizes no gain or loss upon the conversion of the debentures into common stock,[3] and the...