As a financial planner, I love Carta. It is a great tool – no more paper share certificates or poorly scanned copies of stock agreements. Everything is in one place and Carta has a great estimator for ISO exercises. So cool, but it is not law. It still requires the correct inputs from your tech company and you.
This year, we had some new clients come to us who use Carta for their stock options and had some issues. The frustration and anger I feel on behalf of my clients is requiring a bit of a rant below. Here are our best tips for successfully navigating Carta.
What does Carta do?
Carta allows your tech company to easily maintain their cap table, stock plan documents, and equity grants. Carta also allows you, the tech professional, to see all your lovely grants in one place. It even allows you to connect your advisor. That way, you can create a strategy together (instructions HERE if you are interested in connecting your advisor).
Logging into Carta
When you log into Carta, you will see a ‘portfolio overview’ of your current (and past) employers where you have stock or stock options available. You can view any tax forms under the ‘documents’ section and view ‘Account’ to see your exercise history and personal settings.
If you dive deeper on a specific company, you will see your holdings, your option grants, and what is available for exercise. There is also a lovely option to view the exercise simulator in Carta.
Looking Deeper into the Carta Exercise Simulator
I have a love/hate relationship with the exercise simulator. So when I get frustrated, I take a deep breath and remind myself that it is a tool, but not the law.
The exercise simulator is a very rough estimate. It requires two major things to even be a rough estimate:
1. Your company must have updated Carta with the correct FMV of the stock.
This is huge. HUGE. We’ve had clients find out that they exercised ISOs on Carta when it said $X FMV per share when in reality it was $Y FMV per share. Before you go through any exercise on Carta, please check within your company for the correct FMV per share.
This could be as simple as sending the CFO or Comp Manager a quick email: “Hey _____, I want to double check that Carta is correct before I request an exercise of my options. Is the listed FMV of $X still accurate?” This may save you $30,000 in AMT or even $200,000 in AMT. I’ve seen it happen. Want to learn more about alternative minimum taxes “AMT”? Check out our post HERE.
Please don’t let this be a surprise to you when you receive the IRS Form 3921, Report of your exercise of incentive stock options, after year end. It is entirely possible this form will show a different FMV per share than Carta did when you ran the exercise through their system. If your tech employer is a startup, the person in charge of updating Carta may be overworked and understaffed, so an update to Carta could be a low priority until it’s too late.
2. You must accurately estimate your taxable income.
To get a rough estimate in Carta, it is also dependent on you adding in a small little request of ‘what is your taxable income?’. If you forget about a large stock grant for the year, a bonus, a spouse’s income, or some capital gains you plan to realize, then the estimate will mean nothing.
If you do estimate your taxable income well, the estimate may still be far off if you are able to sell previously exercised ISOs in the same year. ISOs go into the alternative minimum tax equation at exercise and at sale. This is a time to go run an estimate with your tax advisor.
Keep your Address Up-to-date
Prior to exercising shares or selling shares, we recommend making sure your address is accurate within Carta. Some states/local jurisdictions may view ISO exercises as taxable and a mandatory tax withholding may pop up. It is best to know this surprise won’t happen and the income won’t be coded to a city/state you do not live in on your W-2.
Selling Shares through Carta
If your tech company offers a tender offer through the system, we recommend downloading every confirmation of sale. Carta does not have an easy place to find a ‘tax basis’ report within the tool. This could leave you in a tax cash crunch if you cannot prepare.
This will be on you and your advisor to construct and maintain a cost basis report so you know what your taxes look like as you are exercising and selling stock options.
Please don’t end up like the pig above. Please use the exercise simulator with care. Carta is a beautiful tool, but it is not law.
#endrant
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
