Your company is going through a major liquidity event: an IPO, merger, or acquisition. Congratulations! Less than 1% of employees hold equity in a traditional company, but at tech companies, typically 60-90% of employees hold some form of options or shares. This means that there’s a particularly unique upside to joining a tech company, but several complications related to tax and financial planning when liquidity occurs.
Information from the company: Vesting, stock purchase plans, and lockup periods
Depending on the nature of your liquidity event, whether your employees are likely to be experienced with equity, and many other company-specific factors, you’ll be fielding different types of questions. Below are the most common and most generally applicable:
- What happens to vested vs. unvested equity? For example, per original equity contracts and agreements with the acquiring company (if relevant), unvested options/shares and RSUs will accelerate depending on tenure and vesting cliffs will be eliminated.
- Will there be an employee stock purchase plan (ESPP)? An ESPP is a type of company benefit in which participating employees can purchase company stock at a discount. Employees can choose to contribute to the plan through deductions from their paychecks between the offering date and the purchase date.
- For IPOs, how long is the lockup period? Typically between 90 to 180 days, during which shares cannot be sold by founders and employees.
This baseline information should be presented to employees in an understandable way as soon as possible. Equity is a key part of the incentive structure for many tech employees, and the company is responsible for educating their employees on the various numbers and dates that may have a significant impact on their personal decisions.
Personal financial and tax planning considerations for employees
Below are the myriad considerations that employees are managing on their own. The answers to these questions vary highly based on how long they’ve worked at the company, how many options/shares they hold, their household financial situations, and their financial goals.
- What will be my tax obligations if I exercise options? If I sell shares?
- The Alternative Minimum Tax (AMT) is a secondary income tax calculation that gets triggered in some situations, including when a large portion of ISO options are exercised.
- Based on how long stock has been held, there will be differences in the capital gains tax. For ISOs short-term or long-term capital gains status is determined based upon when you exercised. For RSUs it depends on the vested date.
- How can I be tax efficient?
- Contribute to retirement plans (401(k), IRA, Roth)
- Utilize 529s
- Utilize FSAs
- QSBS: Qualified Small Business Stock
- Being thoughtful about charitable giving
- How will I manage or invest my windfall?
- Paying down debt
- Major purchases (a home)
- Family planning (having a child, health expenses for elderly parents)
- Investing strategically to grow the windfall
- How much should I put aside for exercise costs?
- Exercise cost is typically calculated based on the strike price in the original equity grant. Projections around how much to exercise (cost) vs. when and how much you could potentially sell for (benefit) can help decide what’s the most worthwhile use of capital.
- What happens if I leave the company in X months or years?
- Shares/options may be accelerated, converted, cancelled etc. and should be a factor when deciding to make a career move .
- I’m a former employee that holds shares or options. How will this event impact me?
- Early employees who hold a sizable amount of shares may no longer be currently employed at the company but will be significantly impacted by the liquidity event.
- I’m a new employee that is joining right before or right after the liquidity event. Will this event impact me?
- Recruiting during this time can be tricky, and new/incoming employees will need to be provided plenty of context.
As you can imagine, this wave of uncertainty and sudden crash course in tax law can be stressful for employees and they often turn to the company (managers, coworkers, etc.) for help. Luckily, what’s helpful to the employees is also helpful to the company’s bottom line. Providing external resources to your employees will lower the risk of misinformation spreading and reliance on managers and HR/people teams for tax and investment expertise.
It’s also a great time to authentically demonstrate your company’s commitment to employee engagement and happiness in a volatile time where employees may be considering planning their exits, as a liquidity event isn’t always welcome news for everyone, particularly when it’s a merger or acquisition.
Employee benefit: Personal tax and financial advising through Harness for Employers
It’s unreasonable to expect that a quick mass email can take care of all of the many different types of questions each employee has, so the best solution would be to offer a resource where each employee can receive advice specific to their own financial situations.
Harness for Employers is an employee benefit program that provides custom resources to each employee, across seniority levels and financial backgrounds. We’ve helped multiple companies through liquidity events to empower their employees and offload the burden and risk from company leadership and HR onto expert financial and tax advisory firms.
Expertise in very specific tax regulations and financial planning strategies is available through advisory firms across the United States, but it’s difficult for most people to devote the time and energy necessary to evaluate each one and find the ones that are true experts with client-aligned incentives, priced within their budgets, and have experience relevant to their needs.
We’ve done the evaluation work upfront and evaluated firms on over 120 attributes to handpick the best for your employees. We connect them to the ones with startup equity experience so they can receive personalized help from qualified sources, holistically — across financial, tax, and estate planning services.
