Today is the moment we spearhead the topic commonly questioned by clients. With Silicon Valley next door and the vast majority of tech companies allowing employees to telecommute, it is no surprise a great number of clients flow over to Sacramento.  The first thought that arises in most employees’ heads when the time comes is “what should I (as an employee) do to plan for the IPO of my start-up Company?” This is after all an ever so important topic evolving from a ‘simplistic’ question to complex planning strategies. If you are one of the few that has worked your tail off to earn an equity stake in your employer Company, then we are tipping our hats off to you. Congrats – the light is ever so near! Now is the time to be diligent. You can either come out of this as a winner or a loser. Proper planning before a liquidity event is vital to ensuring your sudden accumulation of wealth is preserved. There are 3 proactive considerations to take well before the IPO event takes place.


If you do not already have a team of competent individuals experienced in the realm of stock option planning, then it is time to do your homework. Your team should consist of an Estate Attorney, CPA and Financial Advisor. Each has a unique and essential role to planning your overall financial well-being. Many may shriek at the idea of imagining the amounts of money withdrawn from their bank accounts to cover the costs associated with each advisors’ services. Instead of comparing the cost of services to the number of video games you could buy, think of it as an investment tool toward your wealth accumulation.

  1. Estate Attorney – Their job is to review your estate plan, consider the transferability of your vested stock options, allocate assets per your direction and advise as necessary. At the very least, one should have a living trust to simply eliminate the burden of probate if something morbid were to happen. Your family and friends would appreciate it. As we all know, there is nothing more certain than death and taxes.
  2. CPA – Their job is to review your stock option agreements and individual tax scenario, devise a Plan of Action (discussed below), calculate tax plans throughout the IPO process and advise as necessary. They are primarily viewed as the tool to strategically map your tax burden and help their client avoid costly mistakes.
  3. Financial Advisor – Their job is to take your proceeds from the sale of employer stock and harness a better return on investment than your Company. As a general rule, divesting your holdings in the employer Company is a no brainer (we will discuss how much should be divested later). Facebook and Google, are some examples of the exceptions to this general rule. Take a real hard look at your employer Company and determine whether you have the media attention, earnings power and revenue growth to stay neck to neck with those big-time examples.

In the end, implementing a solid core of professionals could save you a ton of money in the form of tax savings, alternative investments, trust creation, etc. Again, view this as an investment; they are professionals in their respective fields for a reason. Better yet, assemble a sound professional team that shares information with one another. You would be surprised at how much is missed when no communication lines exist.


There is a ton of information on the worldwide web – use it to your advantage. When awards are granted, you should have a decent understanding of the personal implications. Awards come in the form of Restricted Stock Units, Qualified Stock Options and Non-Qualified Stock Options. Each type of award has its own set of intricate details that make them ever so difficult to understand. Nevertheless, let’s give it a shot.

  1. Restricted Stock Units (RSUs) are a very common award granted to employees pre IPO. RSUs are limited to a strict vesting schedule where upon vest, the employee receives stock in the Company. Most agreements are subject to a performance and liquidity event clause. The income is treated as compensatory, subject to ordinary rates and payroll taxes. Typically, a portion of your vested stock is immediately sold by the Company to cover federal and state withholding taxes. Most of the time, it is advantageous for an employee to trigger a same-day sale once the lockup period lapses. A common lockup period is 180 days post IPO, however, it is possible that the period is shorter for some. Once RSUs vest, the income is reported on your W-2 and taxed during the year of vest. It is not until you sell your holdings in the employer company, that you realize cash. Upon liquidation of stock, you will report a short/long-term, capital gain/loss based on the holding period. The stock will also be subject to the 3.8% net investment income tax (still in effect after Trump’s Tax Cuts & Jobs Act). For us California folk, the state does not have any preferential capital gains rates.
  2. Qualified Stock Options come in the form of Incentive Stock Options (ISOs) and Employee Stock Purchase Plans (ESPPs). We will focus on ISOs during this write-up as ESPPs will not apply pre IPO. ISOs are typically granted to higher level employees (emphasis on currently employed) with a Fair Market Value (FMV) at date of grant not to exceed $100,000. The benefit to Qualified Stock Options is that the tax hit does not occur until sale of the stock, whereas, Non-Qualified Stock Options are taxed at time of exercise. When an employee exercises their stock awards (this is the same treatment for both Qualified & Non-Qualified) it is important to note that he/she will need to have the readily available cash to buy the rights to those stock awards. This may be a difficult feat for most employees if the exercise price is relatively high. For example, if you received the maximum grant allowance in a given year, it would take 100,000 post-tax dollars to exercise your options. PLEASE BE CAREFUL WHEN EXERCISING YOUR ISOs! We cannot begin to express the amount of trouble employees find themselves in when not taking the necessary precautions before exercising this type of stock option. Things to consider are timing of exercise, stock performance post IPO, the dreaded alternative minimum tax (AMT) and capital gains rates versus ordinary income rates (discussed a little later).
  3. Non-Qualified Stock Options (NQS) are the classic compensatory stock option reported by the media indicating the extreme amounts of wealth captured by top executives. There is no statutory limit on the number of options that can be offered to an employee. There is also no requirement to strictly offer NQS to employees, rather any individual that provides services to the employer Company can be granted NQS. NQS are reported as W-2 income, subject to ordinary income rates and payroll taxes, in the year of exercise. The amount reported as cash wages is equal to the FMV at time of exercise less the amount paid for the stock (strike/exercise price). At the time of exercise, the employee then needs to decide when to sell his/her holdings in the employer Company.

NQS meeting certain restrictions (vesting schedule, no ascertainable value, forfeiture requirements) may allow employees (typically high level) to make an election under section 83(b) to include the discount (FMV less exercise price) as taxable ordinary income in the year of grant. This can be an excellent tax strategy if the value at grant is significantly lower than the future value of the stock. However, substantial risk exists when the ‘discount’ is accelerated as taxable ordinary income before discovering the success of the Company. In the event the stock is worthless, the employee is allowed a capital loss equal to the amount of accelerated taxable ordinary income. This is not an ideal outcome.

Continue reading PART II – Devise A Plan of Action



The information examined in this article should not be interpreted as accounting, legal, tax, or investment advice performed by Rood & Associates, LLP. Although certified public accountants have prepared this information, the reader should seek advice from a professional before implementing the aforementioned advice. The information is not intended to create an accountant-client relationship and is purely educational. Rood & Associates, LLP assumes no liability to update the information due to changes in tax law or other important pertinent factors that may affect the information.