Your company is going public: Navigating complex equity decisions

Let's say you have worked at a tech company for seven years and are now facing a potential initial public offering. You have a mix of nonqualified stock options, incentive stock options, and restricted stock units, and are wondering how to approach your equity compensation decisions. You left the company recently and had to exercise some ISOs, triggering alternative minimum tax for the first time. Now, with the IPO on the horizon, you’re considering using the proceeds for a home purchase in an expensive market like Westchester, New York.

This scenario raises numerous questions about timing, taxes, and strategy. Range explores how someone in this position might think through these complex decisions.

Understanding Equity Compensation: The Basics

Before diving into this scenario, let's clarify the key types of equity compensation that come into play during an IPO.

Nonqualified stock options (NSOs): Stock options that don't qualify for special tax treatment. When exercised, the difference between the exercise price and the current market value could be taxed as ordinary income.

Incentive stock options (ISOs): Tax-advantaged stock options that might qualify for capital gains treatment if specific holding requirements are met (typically at least one year from exercise and two years from grant date).

Restricted stock units (RSUs): Company shares granted to employees that vest over time. These would typically be taxed as ordinary income when they vest, based on the stock's market value.

Qualified small business stock (QSBS): A federal tax benefit that could potentially allow exclusion of up to 100% of capital gains (up to $10 million or 10 times the investment) if qualifying small business stock is held for at least five years.

Key Things To Consider Ahead of an IPO

When facing the question of when to exercise remaining options before an IPO, several factors might come into play.

Were any of the shares QSBS eligible when you exercised?

You might want to investigate whether your equity could be qualified small business stock eligible. This could represent a potentially significant tax benefit. However, the company would need to have been a C corporation with less than $50 million in assets when the stock was acquired, among other requirements. In many cases, especially for companies that have grown substantially, shares might not qualify for QSBS treatment.

Did you file any 83(b) elections or do early exercises?

Many tech employees are too nervous about the company's future to exercise options early, but if you did, you could have a shot at some powerful tax savings. An 83(b) election allows you to pay taxes on the value of your stock at the grant date (often near zero at early stages) rather than when it vests, potentially saving massive amounts in taxes. In essence, an 83(b) election lets you pre-pay your potential tax liability while the company is at a low valuation, with the hope that the equity value increases in the future. Because you’ve paid taxes while the valuation was low, you might be able to avoid those future higher taxes.

AMT Considerations in This Scenario

Let's say you paid alternative minimum tax for the first time when exercising incentive stock options after leaving the company. This raises an interesting strategic consideration. They might actually consider exercising more options in the current year to potentially recapture the AMT credit sooner.

While the natural instinct might be to minimize ordinary income, AMT creates a credit that could potentially be applied to ordinary income tax in future years. To recapture this credit, the regular tax would need to exceed the AMT tax. Since AMT typically tops out at 28%, a higher regular tax rate might be needed to benefit from the credit.

Balancing Life Goals with Tax Optimization

Imagine you are considering using equity proceeds for a home purchase. This raises important questions about priorities.

What are the proceeds intended for? Is the goal to diversify holdings, or to hold out for potential stock appreciation?

For someone prioritizing a home purchase, liquidity might take precedence over holding for potential future gains. Real estate could represent a tangible asset and lifestyle improvement, while holding options might involve market risk and speculation.

State Tax Implications to Consider

What if you had moved from California to New York? You might face an unexpected tax situation.

Equity grants that vested while in California could potentially be subject to California taxes even if exercised as a New York resident.

While New York might provide a tax credit for taxes paid to other states, California's higher tax rates (potentially up to 13.3% vs New York's 10.9%) could mean the credit wouldn't fully offset the tax burden.

Potential Strategies for Different Option Types

Let's look at different approaches for each type of equity.

For NSOs: These could potentially be exercised and sold immediately through a cashless exercise, which might be ideal if there's an immediate need to generate cash. This approach could cover associated taxes and might help generate ordinary income to potentially utilize AMT credits.

For RSUs: These vest automatically and are taxed as ordinary income when they vest—there's no decision to make here—they'll likely create a significant tax event regardless.

For already-exercised ISOs: It's important to consider whether holding these for at least one year from exercise (and two years from grant) would be worth it. Meeting these holding periods could allow you to get favorable long-term capital gains treatment (20% federal rate vs up to 37% for ordinary income) on the entire gain (from original exercise price to final sale price). However, this decision would need to be balanced against immediate liquidity needs and risk tolerance.

The Value of Professional Guidance

This hypothetical scenario illustrates just one of many possible situations, which is why working with a professional financial planning team is so valuable. Working with an advisor can help you:

1. Identify nonobvious opportunities (such as potential AMT credit recapture strategies).
2. Understand intricate tax implications (including multistate considerations).
3. Balance competing priorities (immediate needs vs. potential tax optimization).
4. Create a comprehensive strategy that considers all equity types and life goals.

Equity compensation decisions can be highly complex. The interaction between AMT, state taxes, different equity types, and your life goals is too complex for back-of-the-napkin math.

Skimping on working with a financial professional and missing out on strategic financial moves can be expensive. Working with someone who understands both the technical details and the human side of these decisions? That's worth far more than it costs.

The information provided is current as of September 24 2025, for tax year 2025. The information provided is not meant to be relied on as tax specific advice. Please consult https://www.irs.gov/ for up to date information.

This story was produced by Range and reviewed and distributed by Stacker.