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Big Questions for Money Moments

My company will complete an IPO soon — what should I do with my equity awards? What’s my tax strategy?

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Congratulations. All of the sweat equity you took in lieu of cash compensation will finally pay off. You may be sitting on incentive stock options (ISOs), nonqualified stock options (NQSOs), restricted stock units (RSUs), common stock, or some combination. You instinctively know it’s a good idea to substantially reduce financial loss exposure, but how should you think about these various buckets?

First, think about how much company stock you ought to own for the longer term. How much concentration is sensible in light of your aggregate wealth, your future at the company, and the company’s prospects? You don’t want to let the tax tail wag the dog! In other words, you absolutely should not keep most of the stock simply because it’s expensive taxwise to sell. This is a key financial planning moment for you and your family. Potentially, it could be an opportunity to fully fund some future retirement, providing complete financial freedom. Play the tax game with the residual, not with the nest egg.

Second, within equity awards, ISOs are special; common or restricted stock may be modestly special; NQSOs and RSUs are typically not special, from a tax perspective, at all. This hierarchy is key to determining your tax strategy. ISOs are special because you can implicitly convert a gain subject to ordinary income tax rates to capital gains tax rates. Common or restricted stock can be special if you acquired it at much lower prices than the anticipated IPO price. Thus, you have an embedded capital gain that can be deferred permanently, or perhaps to better tax years — meaning it could be sold down in years in which you expect your federal and state capital gains tax rates to be lower.

Third, if you don’t intend to leave the company, are considered an “insider,” and/or are part of the executive team, you may be subject to lockup restrictions, trading restrictions, and minimum holding requirements. All of these issues are germane to forming a comprehensive exit strategy and impact what to sell, how much to sell, and when to sell (either outright or via a 10b5-1 trading plan).

A competent advisor with tax expertise can help you navigate your equity awards and design a tax strategy that makes the most sense for you and your future goals.


Cerity Partners LLC (“Cerity Partners”) is a registered investment adviser with o ices in California, Colorado, Florida, Illinois, Ohio, Michigan, New York, Massachusetts, and Texas. Registration of an Investment Advisor does not imply any level of skill or training. This commentary is limited to general information, and should not be construed as personal legal, tax, or investment advice. There is no guarantee that the views and opinions expressed in this piece will come to pass. The information is deemed reliable as of the date of this commentary, but is not guaranteed, and subject to change without notice. It should not be considered as an o er to sell or a solicitation of an o er to buy any security.


Meet the Author

Aaron Waxman

Partner

Aaron is a Partner based in the San Francisco office. He provides comprehensive investment and planning advice to individuals. While Aaron works with a wide array of clients, he has expertise in working with multigenerational families, business executives, and entrepreneurs with above average income and estate tax planning needs.

Before joining Cerity Partners, Aaron was a Principal at B|O|S and served on the firm’s Board of Managers, strategizing firm-wide initiatives and making critical decisions on the day-to-day functioning of the firm. Prior to B|O|S, he worked for PricewaterhouseCoopers LLP as a Manager in the Private Client Services Group.

Aaron placed on the Forbes “Best-In-State Wealth Advisors” list for the San Francisco region in 2019, 2020, and 2021. In 2019 he also ranked on Forbes “Top Next-Gen Best-in-State Wealth Advisors” list for California and on its “Top Next-Gen Wealth Advisors” list. Additionally, in 2017, Aaron was the recipient of a “40 Under 40 Award” by the San Francisco Business Times.

Aaron earned his Bachelor of Science in Finance from Santa Clara University. He holds both the Certified Financial Planner (CFP®) and Certified Public Accountant (CPA) designations as well as a Series 65 license. Aaron is a member of the Stern Grove Festival Association Board of Directors. He previously served on the Board of Directors for the Headlands Center for the Arts, Step One School, and Blind Babies Foundation.

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