Non-IPO Stock Options Liquidity Opportunities


When you acquire stock options from your pre-IPO employer, your liquidity is severely limited. The most common ways executives and employees are able to sell their private company shares is through IPO, SPAC acquisition, or direct listing on a public exchange. However, companies can also create opportunities for their employees to sell their shares even before these types of liquidity events.

How can employees gain liquidity prior to IPO?

There are a few ways private companies can generate liquidity for their options-holding employees. They may set up internal trading networks, buy back options from employees, make deals with outside investors, or allow trading on secondary exchanges. Exercised options can also be used as collateral to secure loans.

What options can I sell?

Stock options give you the right to purchase shares in your company at a specified price. Before you can sell your equity compensation, you’ll need to exercise these options. Only then will you own the corresponding shares. Under normal circumstances, employees can exercise and sell only stock options that have vested. Companies typically make options available over a vesting period, during which employees gain full ownership of portions of their options at specified intervals. As options vest, you gain the ability to exercise them.

In some cases, you can exercise options even if they haven’t vested yet. Many pre-IPO companies allow what’s known as “early exercise”—exercising stock options before they have vested. If you exercise options early, it’s important to file a timely 83(b) election if you wish to claim the bargain element for tax purposes at the time of early exercise rather than at the time your shares vest. This can be a significant advantage, as share prices (and, consequently, the bargain element of exercise) are generally expected to increase after IPO.

What should I consider when deciding whether to exercise and sell my options?

While it may be tempting to turn your equity compensation into cash right away, taking the time to develop a thoughtful, detailed plan is the best way to support your long-term goals. Before deciding what to do with your options, consider what you have to gain by selling now rather than later as well as what you stand to lose. In doing so, it’s important to take into account your overall financial goals, your vesting schedule, and the taxes that would apply to your transactions.

Why do I want to sell now?

When making any major financial decision, it’s important to begin by considering your overall financial plan. Rather than trying to time the market or cash in as soon as possible, take a step back and consider your overarching life goals. When, how, and how much of your company equity you choose to sell should be calculated to serve these high-level aspirations. For example, if you want to fund your children’s or grandchildren’s college education, purchase a new home, or retire comfortably at a certain age, these goals will inform the financial steps you take along the way. With proper planning, you can help ensure you have the funds you need when you need then for the things that matter most to you.

What will be the tax impact?

Tax-Advantaged Stock Options

When you exercise incentive stock options (ISOs), the bargain element is subject to the alternative minimum tax (AMT) calculation. Before exercise, it’s important to understand how this will impact your tax liability and plan to make any payments that will be due. If you sell vested ISO shares that you have held for more than one year after exercise and two years after the grant date, you get long-term capital gains treatment on the difference between the strike price and the sale price at the time of sale. If you sell ISOs before these holding periods expire, these earnings will be subject to non-FICA wage rates. This is an important consideration since short-term capital gains rates tend to be substantially higher than long-term rates.

If your options entitle you to purchase shares of qualified small business stock, the potential tax benefit is even greater; if you hold these shares for at least five years, 100% of the gains, up to $10M, could be excluded. It’s important to understand the impact of giving up the tax benefit associated with ISOs or QSBS by selling them early.

Non-Qualified Stock Options

If you have non-qualified stock options (NSOs), the bargain element of exercise is taxed as wages. Your employer will take withholding from your paycheck for this purpose, but often, employees owe more than is withheld, so it’s important to plan for this additional cost. Holding NSOs for one year or less after exercise subjects the gain recognized between exercise and sale to short-term capital gains, while shares held for more than a year receive long-term capital gains treatment. Because the tax impact of selling stock options can be complex, it’s important to consult with a trusted tax advisor who has experience working with pre-IPO employees.

Expert Guidance for Stock Options Strategy

Receiving stock options from your company can present an incredible opportunity to build wealth, but it’s not a slam dunk. Making the most of your stock options takes careful thought and planning and an intricate understanding of how stock options and taxes work. You can set yourself up for success by partnering with a wealth management firm that focuses on the needs of startup employees and has a firm grounding in the IPO process.

WRP Wealth Management provides comprehensive financial services, including overall financial planning, tax planning and preparation, investment strategy design, and more. We take a personalized approach to financial planning, first building an understanding of each client’s goals, priorities, and vision for the future. From there, we craft individual financial strategies designed to get our clients where they want to go. By providing holistic financial advice, we can devise strategies that maximize after-tax gains and most effectively support the goals, people, and causes you care about.

To learn more about the IPO journey and the steps you should take along the way, subscribe to our blog or browse our library of free resources.

Explore Resources →