Danielle Alcide, CFP®, Senior Financial Planner at Range, guides us through the key things people should consider when deciding on what steps to take with their equity (whether it's in the form of RSUs, ISOs, NSOs, or a mix) when a company announces an IPO.
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Navigating the Tax Implications of Mixed Equity Compensation During an IPO
"When you're sitting on ISOs, NSOs, and RSUs with an IPO looming in 3-6 months, the smartest move isn't always the obvious one. If you exercised ISOs and paid AMT in prior years, prioritizing NSO exercises this year could unlock that AMT credit—essentially giving you a discount on your ordinary income tax bill when you need it most.”
"Most people think they should minimize ordinary income the year their company goes public, but there are cases where that’s not always best. When your company goes public, the RSUs automatically trigger ordinary income tax at vesting. As NSOs are taxed as ordinary income at exercise, you could consider incurring the ordinary income tax hit in the current year to ensure you recover any AMT credits while you're at it, rather than letting it sit unused for years."
"If you’re also moving between states (for example, from California to New York), your equity compensation that vested in California remains subject to California tax even after you relocate, but NSOs exercised once you became a New York resident get taxed by New York (with a credit for any California tax paid)."
"Here's what we typically suggest for Range members for pre-IPO tax planning: map out your liquidity needs first, then work backwards. If you need $500,000 after-tax for a home down payment for example, selling RSUs and NSOs immediately at IPO through cashless exercises is worth considering over holding onto your equity for favorable capital gains treatment. Remember, ISOs require you to hold for at least one year post-exercise to get capital gains rates, which means tying up capital and taking market risk when you could be deploying that money into real estate or diversified investments. The tax tail shouldn't wag the investment dog—especially when you're already concentrated in a single stock."
More Like This: Your Company Is Going Public: How To Navigate Your Equity Decisions
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