Participating in Sale/IPO of Company Stock
Holding equity in company that has a successful exit can be highly lucrative. However, your decisions around your equity can have a significant financial impact.
Potential Direct Financial Impact
- Potential liquidity event from an equity cash-out or stock conversion of vested shares.
- Potential tax implications resulting from any immediate vesting, exercise, or sale of equity.
- Complexity and costs associated with triggering the Alternative Minimum Tax (AMT).
- Potential tax savings if you had previously exercised any stock options when they vested (or filed an 83b election) and meet the long-term holding requirements.
- Potential limitations on when you can sell your company stock as a result of a 10b5-1 restrictions or lockup period.
Potential Secondary Impacts
- Incremental tax obligation of exercising vested options or selling shares as part of the deal pushes you into the next marginal tax bracket.
- The need to gradually diversify your holdings away from a concentrated stock position.
- Opportunities to set up a tax-advantaged trust to benefit future generations and/or create a donor advised fund to tax effectively give to charity over multiple years.
Self Completion/Execution Risks
- Exercising stock options could create an income tax liability without any cash proceeds.
- Immediate vesting of more than $100k of ISOs as part of a transaction may cause you to lose your preferable tax treatment.
- Not understanding how an immediate vesting of your options as part of the deal could affect the tax treatment.
- Not setting aside funds to cover taxes if shares are not withheld by your company to cover taxes.
- Concentrated stock holdings can expose you to a tremendous amount of volatility and risk.
- Missing out on significant tax savings by not exercising your options early and not meeting the long-term holding requirements from grant and exercise before the company exits.
Situations Where Expertise Adds the Most Value
- Tax Adviser
Working with a tax adviser may help to evaluate tradeoffs between any payout options presented as part of the deal (equity exchange or cash).If you continue to hold company stock, a tax adviser may be able to help you put a strategy in place to maximize the value of your shares and minimize the potential tax consequences by spreading the realized gains out over several tax years.
- Legal Adviser
Consulting a trust and estate attorney can be advantageous if your equity makes up a large percentage of ownership in the company and/or if you anticipate there may be significant long-term appreciation. Transferring your company stock to a trust while the market value is lower could significantly reduce any gift transfer taxes and/or reduce your tax liability now and later if donated to a charitable trust.
- Financial Adviser
Working with a financial professional can help you consider sale options and to invest a lump sum of cash received from the sale or to gradually diversify away from a concentrated stock holding may help reduce your investment risk. Additionally, a financial adviser may also be able to help you determine the role your equity or cash proceeds may play in your overall financial plan.
- Tax Adviser