This last step may be the most important, so you can enjoy your long-awaited windfall and not get hit with a big surprise come tax season. This communication is for informational purposes only, and contains general information only.
Carta is not, by means of this communication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services nor should it be used as a basis for any decision or action that may affect your business or interests. Before making any decision or taking any action that may affect your business or interests, you should consult a qualified professional advisor.
This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein. Why Equity Education is Essential. A sample stock option plan for your startup. DBA Carta, Inc. Securities and Exchange Commission.
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Neither eShares, Inc. Contact: eShares, Inc. Skip to content. Employee resource center , Equity education. How equity-holding employees can prepare for an IPO. June 6, Chris Hoffmann. You earn the right to exercise your options over time through a process called vesting, the timeframe of which is stipulated by a vesting schedule. For ISOs Pay no tax when you exercise—unless you trigger the AMT details below Pay long-term capital gains tax on sale price - exercise price when you sell—if the shares are sold at least one year after exercising, and at least two years after your options were granted.
Otherwise, sale price - exercise price will be taxed as short-term capital gains roughly ordinary income. The AMT was introduced to prevent this from happening again. The AMT is calculated based on the bargain element: the A value - exercise price. You owe AMT if:. You will have to pay AMT when you file your tax return for the year that you exercise your ISOs it is not withheld at the time you exercise , so make sure to plan accordingly.
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There are a few conditions for getting this tax credit:. There are many other caveats that may warrant speaking with a financial advisor. But the bottom line is: you may want to try to strategically maximize the amount of AMT credit that you can claim later. RSUs are subject to either single- or double-trigger vesting.
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Then, when you sell those shares, your profit i. Again, these qualify for long-term capital gains tax treatment if you hold onto the shares for over a year. Your stock might qualify as QSBS if:. There are a number of other caveats.
Financial Planning for Employees Before and After IPO
The soonest that you can sell your shares is after the lockup period. The lockup period lasts around six months, starting from the IPO date, and is meant to prevent employees from flooding the market with their shares and thus lowering the stock price. This is generally true for traditional IPOs. If your company is going public via a direct listing, there might not be a lockup period. After the lockup period, employees generally employ one of a few selling strategies:. Which of these if any is right for you? It really depends how much money you personally want to invest in your company.
This is cash that you could have invested elsewhere—whether in your next startup, other stocks and bonds, or real estate. This is generally sound advice. But, before following it blindly and selling all your shares, think carefully about how much you believe in your company. Assuming that you continue working at the company, you can access more information about its business and thus, in theory, better predict its stock prices than the general public can. As a valuable employee, you may even have a non-negligible impact on increasing its share prices over time.
Do think critically, though, about how well your company may realistically perform in public markets. Until you exercise, your options do not have any real value. The price that you will pay for those options is set in the contract that you signed when you started. You may hear people refer to this price as the grant price, strike price or exercise price. No matter how well or poorly the company does, this price will not change. You can also hold it and hope that the stock price will go up more. Note that you will also have to pay any commissions, fees and taxes that come with exercising and selling your options.
There are also some ways to exercise without having to put up the cash to buy all of your options. For example, you can make an exercise-and-sell transaction. To do this, you will purchase your options and immediately sell them. Rather than having to use your own money to exercise, the brokerage handling the sale will effectively front you the money, using the money made from the sale in order to cover what it costs you to buy the shares.
Another way to exercise is through the exercise-and-sell-to-cover transaction. With this strategy, you sell just enough shares to cover your purchase of the shares, and hold the rest. You can find this in your contract. When and how you should exercise your stock options will depend on a number of factors. You would be better off buying on the market.
Company Going IPO? Four Things Every Employee Should Consider
But if the price is on the rise, you may want to wait on exercising your options. Once you exercise them, your money is sunk in those shares. So why not wait until the market price is where you would sell? That said, if all indicators point to a climbing stock price and you can afford to hold your shares for at least a year, you may want to exercise your options now. Also, if your time period to exercise is about to expire, you may want to exercise your options to lock in your discounted price. You will usually need to pay taxes when you exercise or sell stock options.