Therefore, even if you you wanted to sell your stock you would be unable to for at least nine to ten months from the date your company files to go public. These factors included meeting their pre-IPO earnings guidance on their first two earnings calls, consistent revenue growth and expanding margins. Again, the research showed only companies exhibiting all three characteristics traded up post IPO. Based on these findings, you should only exercise early if you are highly confident your employer can meet all three requirements.
Your current market value is the exercise price set by your board of directors in their most recent stock grants.
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Boards update this market price frequently around the time of an IPO, so make sure you have the latest number. We strongly recommend you hire an estate planner to help you think through this and many other estate planning issues prior to an IPO. For example, if you were to exercise three months prior to the filing to insure you benefit from long-term capital gains rates immediately post lock up release, you run the risk of the offering being delayed.
Stock Options
In that case you will owe taxes on the difference between the current market price and the exercise price without any clear path as to when you are likely to get some liquidity that can be used to pay the tax. If you think your stock is likely to appreciate significantly post IPO then gifting some of your stock to family members prior to the IPO allows you to push much of the appreciation to the recipient and limits the taxes you are likely to owe.
Putting it bluntly, we strongly recommend you hire an estate planner to help you think through this and many other estate planning issues prior to an IPO. While this might sound morbid it is really a matter of being realistic, after all nothing is more certain than death and taxes. This may sound like a lot but is a relatively small amount compared to the taxes you may be able to save.
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An estate planner can also help you set up trusts for you and your kids that will eliminate potential probate problems should something unfortunate happen to you or your spouse and doing so can be viewed as yet another gift to the rest of your family. In the event you do not plan on making a gift you should consider hiring a tax accountant to help you think through the taxes associated with different early-exercise approaches.
How equity-holding employees can prepare for an IPO
We realize many of you currently use Turbo Tax to do your annual taxes, but the modest fee you will incur for a good accountant will more than pay for itself when it comes to dealing with stock options and RSUs see an example of the type of advice you should look for in Three Ways To Avoid Tax Problems When You Exercise Options. We have written a number of blog posts that explain why you would be well served to sell stock according to a consistent plan post-IPO.
The Valley is littered with stories of employees who never sold a share of their stock post-IPO and ultimately ended up with nothing. In our experience clients who think this through prior to the IPO generally are more likely to actually sell some stock than those who lack a preconceived and thoughtful plan.
Financial Planning for Employees Before and After IPO
It is almost impossible to sell your stock at the absolute highest price, but you should still invest the time to develop a strategy that will harvest most of the possible gains and allow you to achieve your long-term financial goals. Companies that have recently filed to go public are one of the best sources of new clients for financial advisors. You sell after the IPO and make money on the increase in share price. Assuming this is at least one year since you exercised and two years since your grant date , you could end up paying capital gains tax on the money you made from selling, which is usually a lower rate than ordinary income tax.
Keep reading to learn more about exercising and taxes. Option 2: Exercise now and sell after the IPO One reason to consider exercising before you sell is if you have ISOs and you want to take advantage of the tax benefit from holding your shares. Cons: In order to exercise a year before you sell, you have to have enough money in the bank to pay for your options and lock up those funds for a while.
If you have a lot of equity, this option might be cost-prohibitive.
Compound’s guide to the IPO
You are also taking on the risk of any drop in value. Option 3: Cash out pre-IPO if your company will let you Some companies will offer employees liquidity before the IPO, through a tender offer or secondary program. Step 3: Prepare to sell This is the step that employees are usually most excited and most confused about. Have a broker request your shares be delivered from the transfer agent to your personal account. Chris Hoffmann. Chris Hoffmann is a stock plan administrator at Carta, helping companies and employees understand and manage their equity.
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Vested helps you sell your stock options.
Shareworks Products for public companies. The latest Carta news, articles, sent to you once a month. Our CEO Andy Rachleff believes the optimal time to exercise options for most people is when your company begins the process to go public. Moreover, once a company files for IPO, you generally won't be able to sell your stock for about a year:. So if you wait to exercise until your company starts the IPO process, it not only gives you the most certainty that your shares will be worth more than your strike price, but it also may allow you to sell your options as soon as possible while still qualifying for the long-terms capital gains tax.
The benefit of exercising after your company goes public is that you know what the stock is worth at any given time. If your exercise price is above or equal to the fair market value of the shares, it probably doesn't make sense to exercise your options. If you're ready to exercise post-IPO, you can do what's called a "cashless exercise": simultaneously exercising your options and selling the stock in the same transaction. There are a few strategies to consider, but you should check with your CPA about the specific tax implications for your equity.
On average, the best returns came from selling the stock immediately after the lock-up period, and investing the proceeds in a diversified portfolio. We found the longer you held onto the stock, the less you'd be left with — with the lowest proceeds coming from holding on to the stock indefinitely. If your company goes public and you haven't previously exercised your options, it might make sense to do a same-day sale exercise your options and immediately sell the underlying stock in the open market if there's a substantial spread between your exercise price and the current trading price of the stock.
You might want to only sell enough shares to cover the income and payroll tax withholdings, so that you're still left holding a portion of the exercised shares. The benefit to holding your exercised shares is that you can qualify for the lower long-term capital gains tax rate. You can also exercise and hold in a staggered approach — this gives you the opportunity to sell stock as you exercise additional options. This choice can be particularly beneficial if stock has been held for over one year and the associated gain qualifies for favorable long-term capital gain tax treatment.
It's important to work with a great tax accountant so that you can really understand the tax implications of exercising your equity. There are sophisticated tax strategies that you might want to consider before you exercise private or public company stock. Exercising is a decision you're not going to make very often, and it's not worth getting wrong.
It's not always easy to find the right accountant. Popular searches: college savings , retirement , tax-loss harvesting Tags: k , Plan , Burt Malkiel , career advice , direct indexing , diversification , employee compensation , ETFs , fees , financial advisors , financial planning , index funds , IPO , passive investing , rebalancing , selling plan , stock options , taxes , Vanguard.
Exercising your options Feeling anxious about when to exercise your options? Exercising before your company goes public If your company is still private, it can be a challenge to figure out when you should exercise your vested equity. Our advice in a nutshell: If your company offers early exercise AND is less than one year old, you should consider exercising early. Otherwise, wait to exercise until your company begins the process to go public.
Early exercise only if your company is less than 1 year old In an early exercise, you purchase some or all of your unvested options upfront, then receive your shares at vesting time. Get additional savings with an 83 b election If you decide to exercise your options early, it's important to make an 83 b election within 30 days.