For founders, early-stage employees, and executives alike, the opportunity for a sizable personal liquidity event is the result of considerable talent, tremendous amounts of work, and a little bit of luck. But while building a company or product has brought them to the doorstep of an IPO or sale of a concentrated position, it’s at the end of the journey where operational execution is required to harvest the full rewards of their efforts. Taxes and market movements are two factors that make ‘last mile’ logistics a critical determinant in how much wealth is captured upon liquidation of a position. With the possibility of federal and state taxes taking nearly half of the proceeds in an equity sale or a newly traded position suffering a steep sell-off, it’s essential that well-considered investment, tax, and legal strategies are completed with maximum efficiency.
Develop Strategy with Financial, Legal, and Tax Advisors: The obvious, and most likely starting point, in the march to a liquidity event is working with a team of professional advisors. Since there is an overlapping nature to legal, tax and financial actions, collaboration amongst those professionals is important. Creating new entities for gifts to children, philanthropic giving, and generating lifetime income streams should be considered. Identify shares, options, and RSUs with the most beneficial tax treatment for liquidation and determine if any qualify for tax-advantageous Qualified Small Business Stock (QSBS) treatment.
Open Brokerage Accounts and Deposit Shares for Newly Created Entities: On the heels of productive tax and estate planning, with newly created entities in place, corresponding brokerage accounts should be opened. As soon as allowed, shares must be transferred into these entities for initial funding. Placing the appropriate share quantities and lots in the targeted entity accounts prior to liquidation is imperative to optimize after-tax returns.
Move Assets from Transfer Agent to Brokerage Account when Possible: Companies with equity compensation programs generally utilize the services of a third party to help track, administer, and execute holdings on behalf of employees. Those third parties come in two varieties—brokerage firms and stock transfer agents. Their services, technology, and capabilities differ greatly with the traditional brokerage firms, typically far outpacing their transfer agent counterparts who often are a slow and bureaucratic maze. This is most evident at time of executing sales, when the ability to place specific, time-sensitive trade requests with price and lot parameters isn’t possible at transfer agents. Moving shares from a transfer agent to a brokerage account, whenever possible, is usually advisable.
Be in Close Contact with Company’s Legal Counsel: For executives and any other insiders subject to SEC disclosure, working with corporate counsel is an absolute. The utilization of 10b5-1 plans aids in transparency for the company and diversification for the individual. Prior to presenting a proposed plan to counsel, it’s best to understand upfront the company’s policy on 10b5-1 plans as it varies from company to company. Providing a draft proposal in the preliminary stages is an effective way to ultimately gain timely approval. Additionally, ensure that your brokerage firm and financial advisor are in contact with the company as well, as regulatory filings are required on short notice.
When entrepreneurs and others toil for years to build a successful company, the dreams of the financial rewards very rarely involve thoughts of a transfer agent or the IRS. For 40 years, Sand Hill has worked with founders, executives, and their families to navigate the last mile from entrepreneurial dream to financial reality. Should you be facing this wonderful opportunity, we stand ready to help you harvest your hard-earned gains with operational excellence.
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