Frederick is a Director of Corporate Strategy at a tech company that announced it would be going public in one month. His wife Carrie is a Product Marketing Manager at a separate tech firm. At 35 and 36 years old, they find themselves suddenly facing one of the most financially consequential events of their lives with almost no runway to prepare.
Frederick's company gave him a combination of incentive stock options (ISOs) and restricted stock units (RSUs). While he’d purchased a small number of shares already, but the bulk of his ISOs were unexercised. With the IPO a month away, he needed to know: how many ISOs he should purchase before the company went public, what the tax consequences would be, whether he should sell or hold after the lockup period expired, and how to structure everything so he didn’t hand a disproportionate share of the gain to the IRS.
They came to Monroe Wealth Management with no idea how to proceed. They left with a life-changing amount of money.
Frederick’s equity situation involved three interconnected tax exposures: ordinary income tax on RSU vests, Alternative Minimum Tax risk on ISO exercises, and capital gains tax on any subsequent sales. While any single decision might have seemed like the right one in isolation, modeling their interactions revealed that the wrong move in one area could trigger a massive tax liability in another.
We also reviewed Carrie’s compensation to get their combined financial picture: total income, savings, goals, and lifestyle requirements before we built any recommendations. The plan needed to work for both of them, not just for the IPO event. After viewing their whole financial picture, the best plan for exercising and selling became clear
To ensure Frederick and Carrie took home as much of their new wealth as possible, we built a three-part strategy.
- First, we identified the optimal number of ISOs he needed to exercise before the IPO using cash rather than a sell-to-cover approach. Exercising with cash preserved more upside and reduced their AMT exposure relative to a larger post-IPO exercise.
- Second, we determined the correct RSU withholding rate to ensure Frederick wasn’t facing an unexpected tax bill at year end.
- Third, we built a post-IPO diversification strategy using long-term capital gains positioning and tax-loss harvesting to offset realized gains from the sale, reducing the overall tax liability on the transition out of his concentrated company stock position.
Frederick and Carrie saved thousands of dollars in taxes in the year of the IPO and their probability of achieving their financial goals (Monte Carlo score) moved to 100%.
Four years later, we are continuing to help them diversify out of Frederick’s company stock on a schedule designed to minimize taxes year over year, and they have since referred other clients to our firm.
Don’t navigate complex equity decisions alone. Let’s build a plan to protect your gains and reach your goals.
