During a ‘down time’ in the economy, many companies may turn to tender offers to satisfy grumbling employees who expected an IPO. Other private companies may provide tender offers as the company becomes more mature and stable. This is generally in the later stage of the tech life cycle.
Tender Offers are a funny animal. Each company may do this a little differently. Generally, a funding round with an institutional investor will allow this. Then, it depends on the amount the investor will allow to go to a tender offer vs be invested in the business.
This creates a ‘cap’ of how much employees can sell in shares or options. Usually, we see this at around 20% of shares/options owned or $X (could range from $50,000 to $1M).
The majority of tender offers look at all share types equally. So if you own ISOs, NQSOs, or actual shares, you will be able to determine what mix of those will get you to the total 20% of shares available to tender.
How do you decide what to tender in an offer?
Each type of option (or actual stock owned) provides a different pro/con list of how to think about what to tender.
Things to consider:
For shares you own, are any on their way to being eligible for the QSBS exclusion?
Which options are above water (tender price > strike price)?
What liquidity do I need for the next few years? Do I have enough cash or investments I can pull from at this point?
What liquidity would I like to have for the next few years? Maybe you are working towards a new goal that could use a little extra funding
Do I plan on moving on soon to a new company? If so, then options will expire within 60 to 90 days of termination and will require a big cash outlay to exercise any (potentially)
For ISOs, if you exercise and sell immediately, they become compensation income and are treated like exercising NQSOs
Submitting your Tender Offer request
The company will need to confirm whether you can actually tender the full amount requested. There is always the possibility that a tender offer is ‘oversubscribed’ with more demand than expected. If this happens, the company will reduce the total amount of shares or options you can ultimately tender.
Once the tender offer is complete, review your next pay stub / the summary document you receive from the transaction.
Depending on the shares or options you tendered, the amount of tax withheld through the tender offer may not be enough to cover your total tax bill.
Please make sure you make an estimated tax payment on what you expect to owe in the future. It’s never fun to realize you are short on cash once the tax return is finally prepared.
Use the Tender Offer to Augment your Life
I hope you get to use a tender offer to lean into your values. There is nothing like putting a little more money away towards financial independence, buffering your cash cushion, or helping your community and family towards a better future.
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
Many clients we work with have large windfalls of cash from their stock options. Either right after an IPO, a merger / acquisition, or some other event. Some choose to invest their proceeds into the stock market, while others want to own something for long term cash flow. We often hear the question, “should I invest in real estate?” or “What do you think about buying a rental property?” or “should I use my stock compensation to invest in the stock market or in real estate?”
Let’s be clear, using stock compensation to invest in the stock market or in real estate is a great start to building investments and supporting your future life 🙂
This blog really aims to discuss the question, “Should you buy a rental property with your stock compensation proceeds?”
Now, keep in mind this is a loaded question! There are so many variables at play. So, for the simplicity of this blog, we are assuming the investment strategy of buy & holdresidential properties (single-family homes, duplex, triplex). We broke down the primary pros & cons of real estate investing to help you wrap your mind around this type of investment strategy.
This is for educational purposes and does not take into account your personal financial situation.
As always, if you have any questions around real estate or stock, reach out and schedule a time with us!
Pros of rental real estate investments
Leverage: Being able to use leverage (i.e. a mortgage) to stretch your investment dollars is one of the primary advantages of real estate investing.
For example: Let’s say you have $100,000 in cash sitting on the sidelines, and you want to invest. You can:
Either invest that $100,000 in the stock market (or fully buy one $100,000 home) or
Invest a percentage as a down payment on a property and invest the rest of the money elsewhere
If you placed only 25% down on the property, you would have the $75,000 left to invest in improvements, another property, or to invest in the stock market.
Let’s use the 1% & 2% rule. This rule states that you should buy a property that will have a gross monthly income of 1% or 2% of the property value. For example, if you buy a $100,000 home, that property should bring in a monthly cash flow of $1,000 or $2,000. Now, keep in mind this is a big rule of thumb. There are other variables at play (like HOA expenses and other upkeep requirements); but, using this rule of thumb is a good starting point.
The reason this is a big deal is that if you invest in the stock market, only $100,000 of your money is working for you. With real estate, you can leverage these funds with a mortgage, so you can buy multiple homes and increase your cash flow fast.
For example, you can buy five $100,000 homes by placing 20% down on each one. This will make your total investment value of $500,000. Then let’s assume the homes you bought are profitable and meet the 1% to 2% rule, so they cash flow $1,000 to $2,000 each month per property. That will be a total of $5,000 to $10,000 per month of gross cash flow! Now, of course, some expenses, the mortgage, and taxes must be taken into account; That will be for another blog post 🙂
Leverage is a double-edged sword. On the one hand, it enables you to increase the return of your initial investment by using the bank to generate leverage. On the other hand, there is a lot of risk if you cannot make the property profitable or have large unforeseen expenses pop up.
The best way to approach leverage in real estate is by being mindful of the risk you are willing to take. Understand what the ‘worst-case situation’ may be and how much work you want to put into real estate to ensure you do not end up ‘underwater.’
The conversation of ‘worst-case situation’ is even more apparent now that we’ve seen what can happen in a pandemic. Be honest about the downside.
Cash flow: In general (not always), good investments in real estate tend to have higher passive income cash flows than dividend stocks or REITs. While the property may appreciate slower than stock, the cash flow could be stronger than dividends from stocks. This is especially true once the mortgage has been paid off.
One of our favorite metrics is the ‘cash on cash return’ when looking at possible real estate properties to invest in. To summarize, it is a percentage of the amount of net cash flow (before taxes) / total cash invested.
For example, if you buy a $100,000 with a 20% down payment, your cash invested is $20,000. Then, if the property has an annualnet operating income before taxes of $2,250 per year, your equation would be $2,250 / $20,000 = 11.25% cash on cash return.
In general, we suggest that clients obtain properties with at least a 10% cash on cash return or greater for true investment potential. Now, keep in mind that this is a ‘rule of thumb’. So for some properties, it would make sense to invest in even if the cash on cash return is lower than 10%.
Note: net operating income before taxes still includes expenses. i.e. maintenance, management fees, mortgage payments, and so on.
Taxation: This blog does not dive into the tax advantages of real estate investing (that will be another blog post soon!). There are some large tax advantages of this type of investment. This includes:
Depreciation
1031 exchanges
Ability to ‘write off’ expenses
Control: Control is also a double-edged sword. If you are willing to put in the sweat equity (hard work and time), real estate can enable higher returns. For example, if you put in new floors & cabinets to increase perceived value. This allows you to charge higher rent.
However, the downside of control can create:
Paralysis from analysis
When things go wrong, it is on your shoulders to fix
Having control will eat up your time. You will need to make executive decisions often in the beginning, and throughout the journey of being a landlord.
Cons of rental real estate investments
A lot of time & work: Real estate takes A LOT of work, especially in the beginning. Even though real estate is considered a more passive investment, in reality, it takes time. Analyzing deals, finding the right deal, applying for financing, inspecting the property, fixing up the property, and so on. Even after you own the property and get a renter in there, you will have to manage the property & make sure things go smoothly. Even after you own the property and get a renter in there, you will have to manage the property & make sure things go smoothly. Even if you hire a management company, you will still have to be the manager of the manager.
Economic Challenges & difficult to diversify: As with all investments, there are risks. You may encounter vacancy problems depending on the area you invest in for a slew of reasons. Since you only buy one property at a time, it can be difficult to diversify. For example:
If you invested in Detroit during the manufacturing boom, then the plants shut down.
If you invested in Pittsburgh during the steel boom, then the plants shut down
If you invested in Orlando before COVID-19, then Disneyworld shut down.
If you invested in 2007 before the crash of 2008, many properties went ‘under-water’ with their mortgages
If you invested in New Orleans before Hurricane Katrina.
Less than ideal tenants: Many landlords encounter some irresponsible or harmful tenants. Between destructive behavior to your property, lack of payment, and additional headaches, it is wise to highly screen tenants before renting to them. This requires you to develop a screening process.
Hiring a property manager will eat up cash flow but may also allow you more freedom by not needing to deal with “people” issues regularly. Keep in mind that you will have to ‘manage’ the manager.
Lack of liquidity: Real estate is naturally an illiquid investment. This means that for you to obtain the value from your property, you will need to sell it. This could require you to hire a real estate agent. There are very high transaction costs associated with selling properties, and it can take weeks to several months to sell.
To summarize whether to use stock compensation to invest in the stock market or in real estate:
Real estate enables the use of ‘sweat equity’ to increase the investment value, which in turn, could yield higher cash flows.
If you are busy & do not have time to dedicate to the real estate market, we do not recommend you jump into real estate investing at this time.
Know your metrics! You cannot analyze real estate unless you know the mechanics of metrics. Here is a good article that summarizes the six most common metrics used.
Real estate is an investment – if you can’t get the returns you are looking for on a property after 6 months to a year, was it worth not investing in the stock market and sitting on that money?
by Jim Garvin, CFP®.Lead Planner at SeedSafe Financial LLC
At SeedSafe Financial, we review the best ways to use stock compensation to invest in future self – in the stock market or in real estate. We review current real estate investments and provide perspective on future real estate projects that come up. If you’d like to work with an advisor who can help you think about stock market investments and real estate investments, book a time to chat with us now.
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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
How do you evaluate and negotiate your startup offer?
This year is a crazy year for IPOs. Some have gone well, some have gone terribly wrong, and others never even made it to the finish line (yet). Many of the more eccentric CEOs are now getting pummelled by news media, when they once were media darlings. This doesn’t just affect CEOs, but all employees that trusted that CEO to take them to success. The impact this drama has on employees can be draining and cause anxiety to the point they look at new opportunities. Kind of reminds me of how the news outlets treat stock market coverage…
Anyways, this craziness may have finally pushed you to see what else is out there. No more golden handcuffs! Chances are you are in one of three categories:
you may be looking at a larger tech firm post-startup burnout,
looking to join another startup with your gained wisdom, or
leave the industry entirely
For this blog post, we will cover how to think about your startup offer. This is how we begin the conversation with our clients who are going through the interview process.
In a prior blog post, we covered the main levers in negotiating a better offer. This article is more about the types of questions you should be asking in the process and other resources we are aware of.
We’ve helped techies at all levels consider new offers using the below questions and further analysis. In the end, it breaks down to three things:
Are you asking the company the right questions? Sometimes, we are so focused on the recent hurts/pain we went through that we look to what was lacking and not the whole picture in pursuing our next role.
Have you thought about the effect this job will have on yourself? Just because things may look dire, in your eyes, doesn’t mean you should jump ship for the next shiny object. Make sure you are sure this is right for you.
Analysis to do: I love it when a tech company throws out a number of shares or a total stock value for your stock grant. This doesn’t tell the whole picture and may not help you understand what you are really getting
Questions to Ask the Company
For private tech companies, once you get toward the end of the process, these questions will help you understand a little more. The goal is to learn more about the immediate risks in the business, the direction the business is taking, and what your startup offer compensation actually represents…
When was the last 409A valuation done? Will there be a new 409A valuation required for issuing shares in connection with this position?
How much runway does the company currently have? 12 months or less of cash?
How close are you to raising your next round? What is the high-level impact of the money? Further building out the product? Expansion only? New line of business?
Are you positioning yourself for IPO or looking at an acquisition? If acquisition, who are you targeting? What is your expectation for when an exit might happen?
What kind of accelerated vesting provisions are available for your stock grant? Double trigger or single trigger acceleration? RSUs that required double trigger for vesting?
Questions to Ask Yourself
Start-ups have their own risk, and depending upon your personal situation it may be the risk you need to take to get to where you want to be. Or, it might be a shiny object that is distracting you from what you really want in life.
What is driving you to look at this position right now?
Imagine your best work life, what does it look like to you? What does it allow you to do? Where do you want to go with your career in general?
If you feel you are making less than market rate: if your current company gave you a counter offer for the same compensation, would you take it? How much longer would you be willing to stay?
Do you want ‘walk away money’ at some point? This may mean exiting tech, building your own thing, etc. What would life after ‘walking away’ look like for you? How does this role fit into that goal?
What are your plans for maximizing your current job stock compensation?
If ISOs, how much cash out of pocket are you willing to risk?
If RSUs, what will be your strategy for using them vs saving them?
Do you currently budget? Do you feel you have a sense of how much in annual expenses you have? What about savings? What kind of risks can you take at this point in your life?
Not sure the answers to these questions? It may be time to clarify your finances and long term goals with a financial advisor. Schedule a time to chat with us.
Analysis to Do
Review the company in crunchbase.com. Find the company and look at:
recent funding rounds,
information on the executives and investors, and
look into what their previous experience or exits may have been.
Try to find out more about what your market rate for the position might be. Websites like https://www.levels.fyi/ or https://angel.co/salaries may be a good place to start. Search for other sites or use your network to see how much more information you can find out.
Put together a spending forecast for yourself to see what a comfortable cash target could be.
Once You Get a Startup Offer
Evaluate the offer(s) and ask for more information. Often, start-ups and private tech company offer letter state cash salary, number of shares granted, and the strike price. That isn’t the whole picture though! You still need total shares outstanding (i.e. KEY piece of information), ongoing share grant opportunities, or other details around benefits to help make it a more apples to apples comparison.
Understand the dilution risk and chance of what your equivalent total annual comp would be. We’ve put together a basic spreadsheet to help you think about what the all in may be one day.
Look at your current company stock and vesting parameters. What are you giving up? Is it worth it? Understand what decisions you may need to make when you terminate. Remember, most vested options expire within 90 days of termination, so now is the time to consider the costs to exercise and whether it makes sense to.
If you aren’t sure how to move forward on some of these action steps, reach out to us. We do often help clients with their startup offer and evaluate the after-tax cash flow of what these moving parts will do for them in the end.
Best of luck on your new adventures!
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The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
Did you know part of your startup sale can be excluded from federal taxes?
A provision in the tax code helps minimizes taxes for the wealthy investor and startup employee upon a stock sale. It’s called the Qualified Small Business Stock (“QSBS”) exemption. Most startup employees have no idea they can use this!
This allows a C Corp shareholder to exclude up to 100% of their gain from taxes, if they meet certain parameters.
To qualify for the QSBS exclusion, five criteria must be met (legal jargon to follow):
1. The stock must have been directly acquired via an original issuance from a U.S. C corporation (Sec. 1202(c)(1));
2. Both before and immediately after stock issuance, the C corporation’s tax basis in gross assets did not exceed $50 million (Sec. 1202(d)(1));
3. The C corporation and shareholders must consent to supply documentation regarding QSBS (Sec. 1202(d)(1)(C));
4. The C corporation conducts certain qualified active trades or businesses (Sec. 1202(e)); and
5. The stock must have been held for more than five years (Sec. 1202(b)(2)).
You can find a tax checklist for the requirements HERE.
Many early stage startups will meet these criteria. If you are FinTech, then you may need to do more analysis to see if you can be treated as QSBS. This goes for the other excluded industries as well.
Once you determine the startup is a QSBS, you can exclude part of the gain dependent upon when you bought the stock.
Federal Exclusion of QSBS Gain
Acquisition Period
Percent Exclusion (Regular Tax)
AMT Add-Back
Before Feb 18, 2009
50
7
Feb 18, 2009–Sept 27, 2010
75
7
Sept 28, 2010 and later
100
0
The remaining capital gain is taxed at a 28% capital gains rate instead of the 15%/20% long-term rate. This may sound like you are worse off, but the benefit comes in the amount of gain you can exclude from the taxable calculation.
Most sales for higher wage earners will trigger AMT. For AMT purposes, 7% of the excluded gain is added back to taxable income for the computation of stock sold before Sept 28, 2010.
You will also need to consider the Net Investment Income (“NII”) tax at 3.8%. This will be applicable under all scenarios when the taxable income threshold is met.
Let’s see how Qualified Small Business Stock works through an example.
Assume you sell your startup and meet the 5 criteria for considering this stock qualified small business stock.
Your regular ordinary income is about $500,000 with your spouse.
Your share of the business gain is $350,000.
Purchase Date: January 3, 2009
Your estimated tax would be calculated as:
$350,000 x 50% exclusion = $175,000 excluded gain
$350,000 – $175,000 = $175,000 taxable gain
$175,000 x 31.8% (28% capital gains rate + 3.8% NII tax) = $55,650 regular tax
$175,000 x 7% AMT add back x 28% capital gains tax = $3,430 additional minimum tax (AMT)
Estimated total tax due on business gain: $59,080
Estimated effective tax % of gain: 16.88%
Purchase Date: January 3, 2010
Your estimated tax would be calculated as:
$350,000 x 75% exclusion = $262,500 excluded gain
$350,000 – $262,500 = $87,500 taxable gain
$87,500 x 31.8% = $27,825 regular tax
$262,500 x 7% AMT add back x 28% = $5,145 additional minimum tax
Estimated total tax due on business gain: $32,970
Estimated effective tax % of gain: 9.42%
Purchase Date: January 3, 2011
Your estimated tax would be calculated as:
$350,000 x 100% exclusion = $350,000 excluded gain
$350,000 – $350,000 = $0 taxable gain
$0 x 31.8% = $0 regular tax
$0 x 7% AMT add back x 28% = $0 additional minimum tax
Estimated total tax due on business gain: $0
Estimated effective tax % of gain: N/A
What if you didn’t claim the Qualified Small Business Stock exclusion?
Your estimated tax would be calculated as:
$350,000 x 20% long-term capital gains rate x 3.8% NII tax = $83,300
Estimated total tax due on business gain: $83,300
Estimated effective tax % of gain: 23.8%
Now that you see the benefits, what do you need to do to claim the QSBS exclusion?
Make sure you have documentation to backup your belief you meet the 5 criteria.
This may include:
proof of initial capitalization at your purchase date (i.e. 3rd party valuation documentation – tying to your 83(b) election valuation)
proof of stock purchase date (stock certificates or copy of check) and
certification from the company that they are a U.S. C Corporation (i.e. IRS Form W-9)
Hire a tax preparer for the year in question. The simplified example above does not include a discussion of how each state may further tax your business gain. They will also make sure they have the documentation to support the QSBS exclusion on file in case of audit.
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.
If you receive a large grant of RSUs or company stock, you will have many risks. Risk of termination before vesting, risk of market volatility in stock price, and asset concentration are a few. You will need to decide whether you will keep the stock once vested, or if you prefer to sell the stock at vesting date.
Concentrated Positions
A concentrated position occurs when you have a large amount of your finances wrapped up in one company. This can cause problems by increasing risk in your portfolio, causing tax issues, and liquidity needs. These risks compound if you have a long time horizon for your investment or your tolerance for risk in your financial plan is different.
Holding onto your company stock can leave you very dependent on one company’s success.
Chances are your salary, your 401(k) match, and your stock compensation are all tied to one company. This one company can ‘make or break’ your future financial freedom based on how well they do.
Example: If a competing product comes out, this may drop your stock value and require lay-offs longer term. Many smaller tech companies realize this pain when Amazon or Google announce a competing tool. The stock can plummet by 50% within a week.
Example: If a company ends up like Enron or WorldCom, then the drop may even be worse – wiping out your earnings and stock value completely. It may be hard to think this could be your company when we tend to be overconfident when we have an insider perspective on our employer’s prospects.
In these price drop scenarios, you may have paid significant taxes on the vested stock already as well.
On the flip side, if you hold on to the shares and the company goes gangbusters, you may also have significant capital gains accruing. Selling the entire position may not be tax-efficient and cause you a different headache.
Diversification
Holding a large position in one company stock exposes you to higher risk of large movements in the stock price from day to day. Diversification is used to help investors choose a portfolio that offers the best return for a given level of risk. Why take on more risk than is necessary to achieve a given level of return?
A diversified portfolio is based on academic research into the disciplines of economics and finance. Research holds that investing in many different asset classes (i.e. emerging markets, U.S. large cap funds, etc) and in many companies within an asset class will reduce your investment risk. This seeks to avoid damaging investment performance by the poor performance of a single company stock or asset class.
At SeedSafe Financial we practice diversification for long term success. Find out more about our investment management services and consider giving us a call.
Find out how diversified your portfolio is through our free online tool.
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.
Alternative minimum tax (“AMT”) is a hard proposition for many tech employees. When you exercise incentive stock options it increases your net worth, but you don’t actually get any cash. This puts you in a tough spot for paying any AMT later on. This is an important topic for start-up tech employees with a stock option plan and it is easy to miss. Incentive stock options (“ISOs”) are qualified stock options available under a company stock option plan. They must be held one year from the date of exercise and two years from the date of grant. Otherwise, they are considered non-qualified stock options (“NQSOs”). ISOs receive favorable long-term capital gain tax rates upon sale instead of ordinary income rates. However, in the year you exercise ISOs, you may be subject to the the alternative minimum tax.
At year end, your company will report your ISO exercise on IRS Form 3921, per the stock option plan requirements. The IRS and you will receive a copy shortly after year end. This form will help you and your accountant complete the AMT calculation for your annual tax return. What is AMT? AMT is an alternative tax system that takes your regular taxable income from Form 1040 and makes adjustments for special items. ISOs are one of those adjustments. The adjustment amount is calculated as the difference between the value and exercise price at the time of exercise.
Other adjustments generally include state and local taxes paid, real estate taxes, interest on home equity loans, etc. This is a complex calculation and we are discussing a high level view in this post.
This generally results in a higher alternative minimum taxable income (“AMT income”) that is subject to either a 26% or 28% tax in the year of ISO exercise. When you sell your ISO shares, this will decrease your AMT income for the year of sale and reduce your AMT liability below regular tax. As a result, the AMT credit produced from the exercise can then be used to recapture a portion of the AMT you previously paid. When does AMT apply? The AMT income exemption amount for married filing joint at $133,300 or single at $85,700 (for 2024). This begins to phase-out for higher earning households at $1,218,700+ joint or $609,350+ for single. AMT is generally applied to AMT income at a 26% to 28% tax rate. The tax bracket raises at $206,100 for both married filing jointly and single taxpayers.
Confused yet? This is why tax accountants and experienced advisors are so important for tech employees! How do I minimize AMT? A few ways include:
Determine the number of ISOs you can exercise without generating additional AMT liability. This ‘AMT cushion’ amount utilizes the difference between regular tax and calculated AMT tax. If a cushion exists, consider exercising ISOs toward the end of the year when you have a better estimate of taxable income.
Exercise ISOs and sell qualified ISOs in the same calendar year. This ‘ladder’ approach works with ISO exercises over a few years and may significantly reduce the overall AMT you pay over time.
Exercise ISOs and exercise NQSOs in the same calendar year. This will increase taxable income and AMT income at the same time and may reduce the difference under these two tax systems.
Use a prior year AMT credit. An AMT credit is a little convoluted in calculating. In general, this is a credit for the difference between regular tax and alternative minimum tax in the year AMT is paid. When your regular tax liability is higher than your AMT tax liability, you may use a prior AMT credit against your regular tax liability.
If you work for a public tech company and already exercised ISOs at the beginning of the year, look at the prices again. You may be able to do something similar to ‘exercise ISOs and exercise NQSOs’ by selling those earlier 2024 exercises and disqualifying them. When you disqualify an exercised ISO, the stock sale becomes compensation income similar to NQSOs and may open the door for exercising and holding way more shares. Of course, this also depends on your risk level and what you can personally do based on the market environment and your own emergency needs.
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with its own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns. If you live in a state with its own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.
Are you subject to restrictions in selling your company stock?
Many public companies, like Amazon, institute ‘trading windows’ for key employees and executives.
Whether you are a ‘key employee’ generally boils down to access to company profit and loss details. Profit and loss access generally includes: an executive with control over a piece of the income statement or department backend data access to revenue amounts and metrics. These key details may influence the company’s stock price once made publicly available.
A key employee with this insight may trade company stock ahead of the earnings release and profit from the transaction.
Thus, trading windows generally occur after released earnings reports.
What does this mean for you?
The Problem: Many employees decide to sell stock to pay for important expenses or to reduce risk. Employees may wish to buy additional stock based on their understanding of where the company value will be longer term. It may not be ideal for them to wait until a trading window opens.
The Solution: Create a trading plan (SEC Rule 10b5-1).
A trading plan allows you to establish a buying or selling program for your vested company shares over a specific period of time. The plan is then approved by the company and implemented by you.
These plans are very specific in detail to minimize trading flexibility and you may not deviate from the plan instructions, but they do help you through the trading restrictions you are otherwise subject to.
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.
How do you negotiate an offer letter from a tech company or startup? What are the levers you can pull to get to the opportunity you want?
Recently I received the following note: “I found the job I want! I am pleased with the initial offer, but I asked the recruiter to go back and see if there was any more wiggle room to increase my total compensation. #negotiating
The recruiter came back with a new offer this morning. Total increase in my total compensation for year 1, but they increased the RSUs and lowered both of my signing bonuses. How do I decide which offer is best for me?”
Stock compensation, cash salary, and cash bonuses are the levers available for companies to work with in your offer letter. If you require more cash salary to meet your current expenses, then your stock compensation component will be smaller. Everything is a trade-off.
How much less stock compensation should you expect compared to the increase in cash? It all counts on the company’s analysis – so do your own as well!
The main consideration to keep in mind is that you and the company may value these levers differently. Make sure of how you feel about each component to ensure you negotiate for the best agreement for YOU.
First: Review similar job positions at the company for salary and bonus parity.
I love using Glassdoor.com for a quick review of whether my compensation looks right for the market and the position. The more of your type of position at a company, the more accurate and timely the information posted will be.
If you are looking at a tech startup, make sure you review similar compensation packages at similar sized startups (i.e. both Series B).
If you are looking at Amazon or Microsoft, a friend may help you find the salary band for the position. Generally, they will need the Job ID to review internal documentation (if they are comfortable looking it up for you).
Second: If you have an offer with RSUs or Stock Options, think about the trade-offs.
Look for reviews online or ask startup friends what the usual RSU / Stock Option grant is and take some time to decide how you value this component.
What is your risk tolerance when it comes to investing in stock? RSUs will automatically become stock in the company once they vest.
Where do you see the company going? Is their stock currently at an all-time high? Is it a private company raising its next Series funding? What does growth look like? Do you believe in the company’s strategy longer term?
Stock Options in a private company may not be sold until a liquidation event (merger or acquisition or IPO). So you may need to hold onto the stock for 5-7 years and the company may end up closing its doors in the end. Stock Options are definitely a long-term play for most private companies.
Is the grant larger than expected, based on the information you could find? This may be a signal that the stock is at an all-time high price range, so they are cushioning you for any volatility in the next few years. I’ve seen Amazon doing this for some recently.
Third: If you negotiate for an updated offer, consider the differences between the levers and how you value those differences.
Most large companies analyze where they believe the value of their stock will be over the next 5 years and the volatility surrounding that. This is how they determine how much stock compensation equates to cash compensation changes. They want employees to be satisfied over the longer term, but they also want to use their stock well considering the future value.
Consider how you will use the stock compensation.
Will you sell vested RSUs immediately or plan to hold onto some/all for a significant time period?
If your stock options vest, will you exercise the options? Do you have the cash available to buy your options? Will you make an 83(b) election once granted to you?
Does the cash portion of your offer cover your expenses + adequate savings? If so, are you interested in the greater risk and reward in stock compensation?
In determining how you ‘value’ these levers, decide what makes you most comfortable. Are you more comfortable with a bit more cash salary than the unknown RSU or Stock Option value over the next few years? Then discount the value of the stock compensation you will receive in your mind. If you do a great job, more RSUs/Stock Options will be on the way. Many companies in the tech industry prefer to give bonuses of stock compensation instead of cash.
A higher cash salary gives you a greater bump when they assign increases in compensation. This is generally done as a percent change (i.e. Amazon) or in line with performance (i.e. most small startups).
One final note: Review the invention assignment clause. Pay close attention if you are working on, or think you may want to work on, something outside of the business during your tenure. You may need to determine whether it makes sense to buy a website and throw a splash page up and carve it out in the agreement.
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
Many individuals are interested in making the 83(b) election to minimize long-term tax due. However, this may or may not be a good choice for you. I will not go through the analysis and pros/cons of such a choice in this post. This is for information purposes on the mechanics of making the election.
Before making the election, it is important to understand whether your stock option agreement allows this. Your company should share an 83(b) election form with you, if you are eligible for this. You can also look at your stock option plan documents to see if it allows for accelerated vesting of your options.
You need to review your agreement to ensure it allows accelerated vesting. This gives you the choice to exercise your option and buy your stock now to show the stock was transferred to you and is in your control. You will likely still have restrictions on the stock in case of separation with your company.
Please review your stock option agreement and talk to your finance department to find out if you are eligible for this election.
Now on to the mechanics of Completing the 83(b) Election your company provided!
First: Pay your Company for the shares
The first thing you should know about making the 83(b) election is that you must elect to accelerate your vesting and pay for your shares first. Paying for your shares shows you own the stock and the risk of forfeiture is sufficiently minimized from the IRS’ perspective. Once you own the shares you may now make an election on your shares.
Next: Completing the 83(b) Election form
The election form is generally provided by your company (or their attorney). This form asks for your personal information and information on the shares you wish to elect this treatment for. The election must be made within 30 days of receipt of the shares.
The fair market value of the shares is generally the most recent 409(a) valuation or Series funding value for non-publicly traded companies. This is something you should ask your company for.
Gross income is the total fair market value less the amount you paid for your shares. This amount is something you may owe taxes on, depending on the situation. Ask your company if they withhold taxes due via payroll for your election, or if you will be personally responsible for them.
Once the form is complete, it’s time to prepare all the paperwork!
Cover Letter and Copies, copies, copies
Preparing to file the 83(b) election requires a bit of paperwork. This paperwork ensures you have proof of the election if it is lost at a step in the process: on the way to the IRS in the mail, at the IRS office, etc.
You will need to create a cover letter for the election (sample here or provided by your employer). The cover letter will tell the IRS that you’d like a copy of the election stamped as received, and sent back to you in the mail. This ensures you have proof the IRS received your election request. Make sure you include a copy and a self-addressed, stamped envelope for ease.
To the IRS
Cover Letter
Original signed 83(b) Election Form
Copy of signed 83(b) Election Form
Self-addressed and stamped envelope for returning confirmation to you
Send to the IRS via your IRS home office location (found here for 2016). Take the package to the U.S. Post Office and attach a Certified Return Receipt (example here). This receipt will serve as proof of the post-stamp date in case the IRS claims you did not send it within the 30 day period. Keep this for your records.
To your employer
Check for shares (already should be with them – but double check you did this!)
Copy of Cover Letter
Copy of signed 83(b) Election
Copy of Certified Return Receipt
For your records
Original signed 83(b) Election Form
Original Certified Return Receipt
Copy of Cover Letter
Copy of Check for Shares
Stamped IRS returned copy of signed 83(b) Election Form (once you receive it in the mail)
This post does not include a discussion on the pros and cons of making an 83(b) election. This post is for informational purposes on the mechanics of the election. Discuss whether making the 83(b) election makes sense for you with your accountant or financial advisor.
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.
How do you evaluate an offer from a large tech startup or established tech company like Microsoft or Google? The first step in evaluating your offer is to understand it! Below, we discuss one of the components of your offer letter – how Restricted Stock Units (RSUs) and RSU taxes work.
Restricted Stock Units (RSUs)
Structure: Each RSU equates to a share of the company stock. ex. 1 Google GSU = 1 GOOGL stock.
Value: RSU value is tied to the price of the actual traded stock price. RSUs are a little different than stock options, and have an implicit value above $0. As long as there is a stock price at vesting, then your RSUs have value.
Vesting: The initial RSUs grant generally vest over a few years with a 1-year cliff. The 1-year cliff requires you to be an employee for at least a year before receiving any portion of vested stock. At vesting RSUs are taxed.
RSU Taxes:. At the time of vesting, withholding for taxes is made. Depending upon your overall income level, this may or may not be enough to fully cover your tax bill at tax return time. Federally, the withholding tax rate on stock compensation starts at 22% and then converts to 37% on stock compensation above the $1 million mark.
Other general vesting requirements/rules:
Look at the small print – when you terminate employment, vesting stops immediately.
If you are considering parental leave, look to see if your RSUs stop vesting during any non-paid leaves.
Unlike stock options, your RSUs become actual shares at vesting and do not expire like stock options would.
Think the company will go gangbusters over the next few years? Review your incentive stock option plan to understand if you may make an election to pay tax on the value of the RSUs now (Section 83(b) election). Talk to your accountant or financial advisor, since this does come with significant risks.
Trading window: once your RSUs vest into stock, you will only be allowed to trade the stock at set windows through the year. This prevents insider trading. If you have a large set of RSUs vesting, you may decide to make a 10b5-1 trading plan for regular scheduled sales over a period of time.
Taxation: RSUs are generally taxable as ordinary income when vested. Interested in finding out more about the taxes? Watch our YouTube video HERE for a visual.
What are the main issues surrounding RSUs?
When you are negotiating your offer – most of the time they will have an internal analysis to support RSU and salary trade-offs. As long as they keep within the boundaries of the model, then your ‘target compensation’ will be the same, from their view point.
So how do you feel about RSUs vs. cash salary? Keep these things in mind when weighing your options.
Cash flow impact: Withholding RSU taxes are usually paid through a portion of RSUs sold at vesting. These taxes paid are generally displayed on your W-2 as part of your total tax withheld.
Investment strategy: If you receive a large grant of RSUs, you will have many risks. Risk of termination before vesting, risk of market volatility in stock price, and asset concentration are a few. You will also want to decide if you will be keeping the stock once vested, or if you prefer to sell the stock.
Evaluating many offers: Evaluating RSUs and stock options 1 to 1 is generally not appropriate. Employees will generally receive fewer RSUs than stock options since RSUs do not depend on company performance to the same degree. Evaluate your options with your accountant or financial advisor.
Do you feel prepared to accept or negotiate your offer now? If you are interested in further guidance, reach out to me for a quick start project on transitioning jobs.
PS – If you decided to take an offer at a larger tech firm and are considering a financial plan to start out fresh, reach out to us!
The above discussion is for informational purposes only. Recommendations are of a general nature, not based on knowledge of any individual’s specific needs or circumstances, and there is no intent to provide individual investment advisory, supervisory or management services.
If you live in a state with it’s own form of state AMT, this further complicates the matter. AMT calculations can be difficult and you may need professional help, such as that of an accountant, tax attorney, or someone experienced in complex tax returns.
