01For people who work in tech.
Liquidity events are an exciting and important time for your finances. Make a few precise decisions to ensure you maximize your upside.
You must decide:
Stock option exercising depends on your type of shares (ISOs vs NSOs) and your prediction about the company’s future. In both cases, executing your options at least a year before selling the shares will classify your income as long-term capital gains, significantly decreasing your tax burden. If you hold ISOs and believe the company will succeed, exercising early may decrease your tax load even further. For more information, see Compound’s guide to equity.
When you transform your options into stock (by buying them) or liquidate stock into cash, you will be responsible for the tax burden in that specific year. Effectively timing these purchases and sales can ensure you pay the lowest applicable rate by taking advantage of strategies that include early exercising and long-term capital gains.
Moving to a lower tax state can be a good strategy. However, if you have unexercised options, you will owe tax to each respective state based on the number of days worked from grant date to exercise date.
When thinking about selling, take into account the different options regarding your liquidity needs, diversification, and tax treatment (both re ISOs vs NSOs and long-term capital gains). Each situation is unique, and Compound’s team of expert advisers can ensure you implement a strategy that accomplishes your aims.
Given the risk profile of private companies startups, most employees with a large proportion of their wealth in a pre-IPO company are under-diversified. Options for seeking greater diversification include selling shares and borrowing against investment holdings.
Many early employees use a line of credit to access liquidity without having to sell shares (as selling shares would trigger a significant tax bill).
Compound’s goal is to free people from boring financial work so they can focus on their passions. We’re built for people who work in tech—we specialize in nuances like AMT and QSBS. Clients use Compound to maximize their upside without having to deal with all of the administrative hassle.