Continued from PART I last week.


Now that we are hopefully more familiar with the benefits of gathering a professional services team and the types of stock options personally affecting you, we can zero in on a Plan of Action to implement before your employer Company goes public. Talking with your professional services team will spur you to begin thinking about your future financial goals. Maybe some of you will decide to stay with the Company and exercise and sell all of your shares over a series of years. Others may say, “this is my opportunity to jump ship”, liquidate all holdings and take their wealth to the beaches of Krabi. No matter the situation, a Plan of Action should be created to assist in your liquidation strategy. Naturally, each Plan of Action should and will be different. Here are some of the items one needs to consider when devising a Plan of Action:

Timing of Exercise

One can either exercise before or after the IPO (with certain exceptions). Because of the uncertain nature of an IPO, most employees will wait to exercise until after. If you have the foresight and cash available to exercise some of your options pre IPO, the tax burden could significantly drop. Although, this can be a risky bet and one you may not want to take. Your decision will also depend on the date the options were granted, the exercise price, the vesting schedule, etc. to really pinpoint the proper time to exercise. In some cases, employees will need to wait until RSUs vest and NQS are exercised and sold before they have the available funds to exercise their ISOS. Timing of exercise is a tricky area and makes for a difficult decision.

Order of Stock Award Exercise and Sale

The type of stock option will really determine when you should exercise and sell. RSUs will typically require a liquidity event before vesting. Most RSUs are sold as same-day sales upon vest because this usually makes the most sense.

NQS are also typically sold the same-day as exercise, unless the taxpayer decides to exercise and smooth their sales over a certain holding period (see example below). Remember that once the NQS are exercised, the discount is reported as compensation on your W-2.

ISOs are an entirely separate beast from RSUs and NQS. As mentioned before, you must consider the timing of exercise, the amount of cash needed to exercise, AMT implications and capital gains versus ordinary rate considerations. The decision to hold an ISO position will largely depend on the individual and their risk tolerance. In an ideal world, one would exercise on January 1 of a given year and closely watch the price of the Company. This gives you an entire year to decide whether the position should be sold before year end or held to reap long-term capital gain rates. The stock should be sold before December 31 if the price declines below the value on the date the option was exercised. This will also ensure no AMT adjustment is made. If the price increases post exercise, you can sell after January 1 of the following year and lock in long-term capital gains rates. The sale will also provide you with the cash needed to cover your previous tax year AMT hit. A negative AMT adjustment will be reported on your tax return in the year of sale. For us California folk, AMT may also be an issue. Select a stop loss price at time of ISO exercise to guide you in the instance of a price decrease. This is an area destined for a CPA.

Selling of Stock Awards

A piece of advice – set a goal to divest a percentage of your holdings into effective alternative investments. No investor should have a majority of their wealth tied up in one Company. A great question to ask yourself during this goal setting period, is if you had $100,000 of cash to invest anywhere, would you allocate 100% to your employer Company. If not, why? If so, why? Some individuals decide to deplete all of their Company holdings, while others have maintained a 5% – 20% stake. Do not maintain 100%!

In some cases, an individual may want to sell all of their holdings ASAP (by far the most risk averse decision). One reason for this is due to the projected decline in stock value after the IPO. More often than not a Company continues to drop in value post IPO. If this is expected (see discussion below), one would desire to cash in all of their vested holdings ASAP. By choosing this route, you would basically rid of any tax considerations as the exercises and sales would all be treated as ordinary income (assuming no stock was exercised pre IPO). Immediately selling and divesting your funds ensures the safety of your wealth.

Some may decide to sell their stock over the course of 1, 2 or 3 years. By creating a plan before the IPO, you can then extract the external factors such as timing the market and removing the stressful mind games. A plan would be configured to sum your total shares (including non-vested), determine the final amount of employer stock holdings after divestiture (see above), the length of holding period and order of option type.

Example: Let’s assume an individual holds 10,000 vested/exercised shares and plans to remain employed over the next two years with an additional 5,000 shares to be exercised/vested over that time period. In total, the individual holds 15,000 granted shares. The individual decides she wants to maintain a 5% stake in the company, meaning 750 shares will remain held, and the remaining 14,250 shares are to be sold over two years. She determines that the best way to smooth out her liquidation is to sell roughly 594 shares (4.17%) each month. Now the type of stock option may sway her decision to sell some stock, RSUs and NQS, before ISOs.

Note: Please do not let the idea of reaping long-term capital gain rates cloud your judgement from selling any shares. You must contemplate the economics behind realizing the value of the stock now versus deferring liquidation a year or more from today solely for tax purposes. By divesting to alternative investments, you are spreading your risk. No employee should lose significant amounts of money due to the fear of paying a higher tax rate at time of sale.

Post IPO Earnings Reports & Market Conditions

IPO stocks typically reduce in value leading up to the lockup expiration. If a Company performed better or met its earnings during the lockup period, it is more likely to rebound to or above its IPO price. If the first two earnings targets are missed, the stock could have a devastating downward trajectory. Obviously, the worse the outcome, the quicker you should divest and diversify as efficiently as possible.

Another major factor to consider is the current market condition at time of IPO, and later, lockup expiration. Is there a doomsday scenario forming on the horizon? Is the tech world overvalued? Of course, having the foresight to time the market perfectly is nearly impossible. This would be a great conversation to have with your Financial Advisor.


If you adhere to the three recommendations, you will stand in a much better position come IPO. Invest the time and money to gather the necessary tools to preserve and accumulate wealth. Become knowledgeable on the type of options you hold and the Plan of Action you want to take. Be sure to think critically about your financial goals and life considerations. This is an exciting moment. Those long days of grinding are coming to fruition – take advantage of this financial opportunity! Shoot us an email if you have any questions or seek additional help!



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.