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.