Going Public?
We don’t believe there is one right answer, your goal is to consider all the options on the table.
How should you think about stock comp at IPO time?
Stock comp components include: Founders/founding team members stock (aka, owned for many many years), Incentive Stock Options, Non-qualified Stock Options and Restricted Stock.
We opened our doors in 2016, and immediately began helping clients with what to do with their stock comp in IPOs. Since then, it’s only become more complicated. Is it a direct listing or an IPO? Or is it a SPAC deal?
Each type of listing has its own pitfalls and each company has a different level of ‘seasoned’ internal operators who know exactly what to do and how to communicate it to you. Here is an article that makes me CRINGE about lack of communication.
My head just spins thinking about it!
First Up – Know what you have now
This is the part where we advisors roll our sleeves up and get in deep. Show me that paper trail!
Did the shares start in Carta or logged into Carta after the fact? What transactions were made on this platform? Who was the transfer agent and were all shares transferred? Did it end up at Shareworks, Schwab, Morgan Stanley, or E*Trade?
Most of these Custodians will not report cost basis information transferred in – so come tax time, that 1099-B might show a huge $0 and the wrong purchase dates.
To avoid this last minute hustle, we recommend:
- Download everything you can from your stock portal prior to transfer: activity, original grant and exercise information, and past year tax docs. Make a Google Drive folder to keep it close.
- Make sure you log into your transfer agent portal and confirm the shares transferred as expected. Then, make sure you appropriately moved all shares out of the transfer agent portal to the new custodian. Sometimes a share or two can linger if this is a merger into an IPOing company or SPAC.
- Keep a cost basis ledger of where your shares are from like this:
Date Acquired | Type | # of Shares | Exercise Price | Acquired FMV | Acct Acquired In | Acct Currently In |
|---|---|---|---|---|---|---|
1/1/2020 | ISO | 200 | $2.37 | $5.00 | Carta | Schwab xxx210 |
5/31/2017 | NQSO | 300 | $0.94 | $0.94 | Carta | Schwab xxx210 |
1/1/2022 | RSU | 100 | $22.10 | E*Trade xxx9001 | E*Trade xxx9001 |
So now that you know where they are – what do you do with them?
If you love the company and want to be there for a while, our advisors tend to look at a laddered approach for exercising/selling options over time to minimize intra-year AMT implications and help with some dollar-cost averaging. This still depends on the risk you can take and the risk you want to take…
If something is happening fast, you want a strategy ASAP to ensure you don’t suddenly make emotional/stressed decisions in the moment. Here at SeedSafe, we will help you consider the trade-offs of exercising/holding, exercising/selling, etc. We look at the estimated tax due based on those decisions now (AMT or disqualifying ISO positions causing ordinary income taxes) and how that money can augment your life for the long term.
There is definitely a balance of not letting the tax tail wag the dog and not having your eggs all in one basket. Holding a moon shot is no problem, but pay yourself some first to make those next few years in life feel a little more secure.
Then, once you start making moves, make sure you are aware of alllll the tax fun. Some states have an Alternative Minimum Tax (“AMT”), just like our Federal AMT. Make sure you know what you are paying between taxes and exercise cost. Are you ready to take the risk?
Plan on leaving within the year? To a higher paying job or a sabbatical? Maybe you care about timing then.
Plan on staying and you have big stock comp years and lower stock comp years? Then maybe there is an option to use up some lower tax brackets over the next few years or lean into those sweet new ‘IPOed company’ benefits.
This is when we need those nice Big Company benefits help too. You may be able to decide what gains you want to take off the table toward other tax-deferred or pre-tax opportunities.
Disclosure: Recommendations are of a general nature above and are not based on knowledge of any individual’s specific needs or circumstances. There is no intent to provide individual investment advisory, supervisory or management services.