Tax Planning for Stock Options & Equity Compensation
Tax Strategies for Pre-IPO and Public Company Founders and Employees with Stock Compensation
Darrow Wealth Management specializes in stock option advisory and planning for individuals at public and private companies who are navigating stock options and other forms of equity compensation.
Tax management strategies for the stock compensation lifecycle:
- Pre-IPO tax planning for stock options, RSUs, and common shares
- Startup stock tax strategies for founders and early employees
- Tax implications during an acquisition, merger, or sale
- Tax-efficient wealth planning for public company founders, employees and executives post-IPO, SPAC, or direct listing
- Tender offer tax implications
Forms of equity compensation:
- Incentive stock options (ISOs)
- Nonqualified stock options (NQSOs)
- Restricted stock awards (RSAs)
- Restricted stock units (RSUs)
- Founders shares
- Profits interests
- Employee stock purchase plans (ESPPs)
- Common stock
Through an ongoing advisory relationship, we help clients consider various tax planning strategies around exercises, sales, and even negotiating the form of equity compensation.
The Darrow team of financial advisors specialize in optimizing equity compensation and pre-IPO stock options, including the tax implications, but the final word on your tax situation belongs to your tax preparer. We provide the strategy and holistic perspective; they provide the formal tax advice and filing. To make things easy for you, we often take the lead in coordinating these efforts.
Nationally Recognized Specialist in Stock Options and Equity Compensation
Kristin McKenna, CFP®, President of Darrow Wealth Management, is a nationally recognized specialist in employee stock options and equity compensation planning. Our work and perspectives have been featured by a range of media outlets.
Publications above reflect media organizations that have quoted and/or published articles authored by Kristin McKenna and should not be misconstrued as a current or past endorsement of Kristin McKenna, Darrow Wealth Management, or any of its advisors. Please refer to the media page for more information and links to published works.
Tax Management Strategies for Stock Options and RSUs
Strategic planning and comprehensive strategies for stock compensation.
Exercise strategies:
- Pre-IPO or acquisition
- After an IPO or acquisition
- Early exercises of unvested options
- Before retirement or a job change
- ISO vs NSOs
- 83(b) elections
- Form of exercise: net exercise, cashless, monetary
- Projected tax impact
Sales strategies:
- Which type of equity to sell and when
- Quarterly planning to align with trading windows
- Grant and lot selection
- Same-day sales versus exercise and hold
- Managing RSUs at vesting
- Projecting net proceeds
- Considering taxable gains versus economic value
- Tax planning for a tender offer sale or during an acquisition (cash or stock), IPO, SPAC, or direct listing
AMT stock options planning for ISOs:
- Ways to avoid AMT surprises
- AMT tax strategies for incentive stock options
- Timing exercises with sales
- AMT credit utilization
Tax-conscious investment strategies with proceeds:
- Tax-loss harvesting
- Direct indexing
- Tax-aware rebalancing
- Asset location
Other:
- Flagging shares that may qualify for tax-free sales under Section 1202, qualified small business stock (QSBS)
- Using trusts to maximize QSBS tax benefits
- Reporting to tax preparer, annually or after quarterly sales as needed, including outside investment investment income
- Unofficial tracking of holding periods and basis across grants and exercises
- Considering multi-state tax issues and residency changes
- Reducing tax by donating stock to charity
- Gifting shares to family
While we specialize in the strategic tax planning of stock options, our work is designed to complement—not replace—the services of a tax preparer. We will collaborate with your tax professional for a final review of the strategies we develop together.
Advising Employees & Founders Expecting a Stock Option Payout
Ongoing Wealth Management Support (As Part of the Advisory Relationship)
Darrow Wealth Management is a fee-only financial advisory firm and full-time fiduciary. All of our clients need ongoing support, and the Darrow Private Wealth Management Program provides investment management and comprehensive financial planning designed to help you implement a long-term strategy after a liquidity event.
Stock Option Advisory Insights
7 Ways to Manage Concentrated Stock Positions
What is a Concentrated Stock Position? If one stock makes up more than 10% of your overall asset allocation, it’s probably too much. A diversified portfolio is the cornerstone of a risk-adjusted investment strategy. Since single stocks don’t move like the broader market, you’re exposed to much greater risk. Whether
Selling Shares When the Lockup Ends: Managing Equity and Liquidity Post-IPO
Selling Stock When Your IPO Lockup Expires If you have stock or options at a private company that’s going public, it’s important to get a plan in place for selling shares when the lockup expires. Current and former employees can’t sell immediately after an IPO due to lockup periods. Exactly
What Does an IPO Mean for Stock Options? What Happens to Employees When a Company Goes Public
Whether you work for a private company about to IPO or one that’s recently gone public, you may wonder what that means for employees and their stock options. An IPO provides liquidity for the company and serves as an exit strategy for founders and investors, while also creating a way
ISO Taxes: How AMT and AMT Credits Work + Avoiding AMT on ISO Exercises
If you have incentive stock options, you’ve probably heard of the alternative minimum tax (AMT). Essentially, the alternative minimum tax is a prepayment of taxes. In years when not subject to the AMT, you can receive an AMT credit, which reduces your tax bill to reflect prepaid tax. The alternative
Frequently Asked Questions About Stock Option Tax Planning
What does a stock option advisor do?
A stock option advisor helps individuals evaluate equity compensation decisions such as when to exercise stock options, how taxes may apply, and integration with your overall wealth management strategy. The goal is to help you understand tradeoffs before making choices that may be difficult or impossible to reverse.
When should I get professional help with tax planning for my equity?
It is often helpful to speak with a stock option specialist before an IPO, acquisition, tender offer, or major exercise decision. Many planning opportunities exist before a liquidity event or before stock options are exercised.
Are stock option tax planning services offered on an hourly or project basis or only as part of an ongoing wealth management relationship?
Stock option advisory services are only offered to wealth management clients as part of an ongoing relationship, which includes asset management and comprehensive financial planning.
We are currently accepting new clients, with an investment minimum of $2,000,000 (upcoming liquidity events may qualify). Please see this FAQ page for more common questions about working with us.
What if I have multiple types of stock?
Yes. Many individuals receive multiple types of equity compensation over time. Having multiple types of stock can present a planning opportunity as tax outcomes differ across equity types.
Do you help with a tax-efficient sales strategy after an IPO?
Yes. After an IPO, many individuals face concentrated stock exposure and need to develop a plan to sell company stock in a tax-efficient way when the lockup ends. Here are some of the advanced trading strategies we may use to diversify large single stock holdings.
Do you coordinate with my CPA or estate planning attorney?
Yes. Coordination with the entire advisory team is often essential, particularly on the tax side as we intend to complement—not replace—the services of a tax preparer. Working together helps ensure decisions around equity compensation align with your broader tax and estate plans.
Are there tax implications if I exercise options right before an IPO?
Yes, there are AMT considerations if you have ISOs and regular tax and withholding requirements to contend with if you have NSOs.
There are many other considerations near-term pre-IPO exercises too, such as cash, liquidity, and volatility. From a practical standpoint, most employees face significant hurdles exercising stock options in the weeks or months leading up to an IPO. This is because of the cash needed to buy the stock or pay taxes. Early employees can usually buy the stock cheaply, but the taxable spread is massive. The reverse is usually true for more recent hires.
I just started working for a startup and have stock options. What should I do?
Recent hires with equity can have a lot of upside, especially if they manage their options right. Of course, many startups fail, so you have to be comfortable with losing your investment. The benefits for early employees can be significant: the cost to buy the stock is often minimal and there may be little or no taxable spread. In other words, you may be able to exercise your option to buy the stock without incurring tax.
These factors reduce the financial risk if the company doesn’t survive, but doesn’t eliminate it.
As with any good investment, it all starts with education. If you’re a startup employee, here are some strategies to consider early on with your ISOs or NSOs.
- Early exercises of unvested options
- Qualified Small Business Stock rules (Section 1202) to qualify for tax-free sales of startup stock
- How stock options are taxed
- What happens if you leave your job