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My company lets employees use a recourse note, instead of cash, to exercise options. What risks are there in using such a note?
Employees should understand that the note represents a real personal financial obligation, and should assume that the note will have to be repaid in full (with interest) when due, which may happen at a time when the acquired stock is not liquid, or has declined in value or even become worthless (as in bankruptcy). Even if the company were to forgive the note, in whole or part, when due, the amount forgiven would be treated as taxable ordinary income to the employee, and it might also be subject to an additional 20% golden parachute excise tax.
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