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Finish Strong: 9 Key Financial Moves to Make Before Year-End
November 7, 2024
You’ve been working tirelessly at your job, driven by the promise of something big on the horizon. Maybe you believed in your company’s mission from the start, or maybe you saw the potential for growth—not just for the business, but for yourself, too. Over the years, you’ve built and contributed to the value of your company—whether through founding the business, accumulating equity compensation like stock options or Restricted Stock Units (RSUs) or other forms—knowing that one day it could pay off and transform your financial future. Now that day has come, and you’re looking for the right guidance.
That’s why wealth planning and understanding strategies for financial windfalls are essential to maximizing your benefits. We’re not just about managing money; we’re about helping entrepreneurs and employees alike understand how this new wealth can shape their lives and how effective wealth management can secure long-term success.
In this article, we’ll explain different types of wealth transactions—whether it’s an IPO, merger, acquisition or buyout—and guide you through the key decisions you’ll need to make during the process. We’ll provide the tools to help you approach your financial future with clarity and confidence.
Whether you’re just beginning to explore your choices or are already navigating this process, remember: You’ve got this—and we’re here to support you every step of the way.
| Learn the Lingo
We know that not everyone reading this guide is familiar with the terminology used in discussions about liquidity events. If you come across any terms that need a bit more explanation—we’ve got you covered with a glossary at the end. |
Table of Contents
Embracing your financial turning point
What are liquidity events?
Preparing for a liquidity event
Post liquidity event considerations
Don’t navigate a liquidity event alone
Glossary
In the world of finance and business, a liquidity event is one of those big moments where everything changes. Liquidity events, such as IPOs, mergers and acquisitions, require careful liquidity event planning. Whether it’s pre-IPO planning or developing a solid exit strategy, these financial windfalls can reshape your financial future, allowing you to convert your equity into cash and create new opportunities.
These significant payouts give shareholders a chance to “cash out” realize the value of their investment. These events can take many forms, and understanding how they work is crucial for entrepreneurs, employees and investors alike. Knowing what to expect and how to plan for a wealth transition can help you maximize your financial outcome.
Asset sale: This occurs when a company sells off its assets, such as real estate or divisions of the business, and uses the cash to provide liquidity for shareholders.
Initial Public Offering (IPO): An IPO happens when a private company offers shares to the public for the first time. Once public, employees and investors typically after a six-month lock-up period, may sell their stock in the stock markets. The process requires extensive regulatory filings, like the S-1 form with the Securities and Exchange Commission (SEC), and often involves months or even years of preparation. Many employees with concentrated stock face tough questions, like should I sell my RSUs when they vest? It’s crucial to develop a strategy that takes tax implications into account.
| Special Purpose Acquisition Company (SPAC)
SPACs are an increasingly popular alternative to traditional IPOs, allowing companies to go public by merging with a listed “blank check” company. This path can streamline the process, providing liquidity without the extensive regulatory filings of an IPO. Learn more about the rise of SPACs. |
Mergers and acquisitions (M&A): The merger of two companies or the acquisition of one company by another can result in shares being purchased or converted into cash. If the acquiring or merged company is public, shares may become liquid; otherwise, shares in private companies typically remain illiquid.
Private equity buyout: A private equity buyout occurs when a private equity firm acquires a controlling interest in a company, often through the use of debt to finance the purchase (leveraged buyout). This transaction provides shareholders and employees the opportunity to sell their shares and turn their equity into cash. It frequently involves taking the company private, allowing for restructuring or operational improvements away from the scrutiny of public markets.
Recapitalization: Recapitalization occurs when a company restructures its debt and equity mix, often by issuing new debt or equity, paying out dividends or buying back shares. The goal is to improve the company’s financial structure, boost shareholder value or raise funds for growth. This strategy allows companies to realign their financial footing while offering liquidity and growth opportunities.
Secondary market sale: This refers to the sale of privately held shares of a company, typically by early employees or investors, to outside private investors before a liquidity event like an Initial Public Offering (IPO). This allows shareholders to “cash out” some of their equity and get early liquidity without waiting for the company to go public.
Tender offer: A tender offer occurs when a buyer (often the company itself, a private equity firm or an external investor) offers to purchase shares directly from shareholders, typically at a premium over the current value of the shares. The company may make this offer to employees, investors or other stakeholders to provide liquidity or facilitate a buyout.
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What to do with a tender offer Tender offer taxes: Many people may not be aware of the tax implications that come with a tender offer. If you participate in a tender offer, you’ll likely face capital gains taxes. The rate depends on how long you’ve held the shares—if it’s less than a year, you may be subject to short-term capital gains, which are typically taxed at a higher rate. If you’ve held the shares for over a year, you could qualify for long-term capital gains, which often have lower tax rates. Consulting a tax advisor is a smart move to understand any potential tax burdens from a tender offer. Tender offer vs. share buyback: A tender offer and share buyback are often confused. A tender offer gives you the opportunity to sell your shares directly to the company or an investor at a premium. This is different from a share buyback, where the company purchases shares on the open market, typically without offering a premium price. Due diligence tips: Before accepting a tender offer, it’s important to do your homework. Review the company’s financial health, consider the future growth potential and talk to your financial advisor. Accepting an early tender might offer you immediate gains, but holding onto your shares could provide higher profits down the line. |
Navigating a liquidity event can be complex, with many financial, legal and tax considerations to keep in mind. To help you better understand the process and make informed decisions, we’ve compiled answers to some of the most common questions surrounding liquidity events. Whether you’re an entrepreneur, employee or investor, these FAQs will give you the foundational knowledge needed to approach your liquidity event with confidence.
Financial milestones like IPOPs or private equity buyouts can be life-changing, offering opportunities for substantial financial gains and the chance to redefine your financial future. However, the path to fully capitalizing on these opportunities can also be overwhelming. Early planning is crucial, and it’s not just about the transaction itself—effective financial planning ensures that you make informed decisions before, during and after the liquidity event.
Our approach includes understanding how Incentive Stock Options (ISOs) and Non-Qualified Stock Options (NQSOs) are taxed. Stock option planning can help you make informed decisions about exercising shares and minimizing tax liabilities. Careful consideration of the tax implications of stock options ensures you keep more of what you’ve earned.
We’ve guided countless clients through the complex process of preparing for liquidity events, including utilizing tax-saving strategies. Our experience spans helping business founders, executives and employees transform newfound wealth into lasting financial security. From pre-transaction meetings to map out your vision to implementing a tailored financial plan post-transaction, our award-winning wealth managers make financial planning clear and actionable, providing the experience you need to navigate this pivotal moment.
10b5-1 plans
If you’re a corporate insider or an employee with restricted stock, a 10b5-1 plan allows you to pre-determine stock sales within a specified period (typically 6–12 months) to manage compliance and reduce the risk of insider trading accusations. This plan can be a strategic component of your liquidity approach, giving you control over when to sell shares while addressing compliance concerns.
In California, RSUs are taxed as ordinary income when they vest, which can result in significant state tax obligations. Planning when and how to exercise shares within a 10b5-1 plan can help align your equity sales with tax-efficient timing and cash flow needs.
Qualified Small Business Stock (QSBS)
If you’re holding Qualified Small Business Stock (QSBS), you may be eligible for significant tax benefits. Under certain conditions, QSBS holders can exclude up to the greater of $10 million or 10 times the adjusted basis of the stock from federal capital gains taxes. Understanding whether your shares qualify for QSBS treatment and how your state handles the taxation of QSBS can save you a substantial amount in taxes when you sell.
83(b) Election
An 83(b) election is a tax strategy available for those receiving stock as part of their compensation that vests over time. Filing an 83(b) election allows you to pay taxes on the stock’s value at the time it is granted, rather than when it vests; or, in the case of stock options, when exercised if the plan allows you to exercise the stock options prior to vesting (an “early exercise”). If the stock appreciates significantly by the time you sell the shares, this can result in lower overall taxes by allowing you to take advantage of capital gains rates on the appreciation if you sell the shares 12 months after (or later) the date of the 83(b) election. This can be a particularly attractive strategy when RSUs are granted at a very low price and/or when stock options are granted at a very low strike price and the plan allows you to exercise the stock options before they vest.
By incorporating these tax strategies into your liquidity planning, you can potentially minimize taxes, which could help you keep more of the wealth you’ve earned. From capital gains tax strategies to tax-efficient wealth transfer options, careful planning can contribute to a more secure financial outlook after liquidity.
Preparing for a significant payout, whether through an IPO, merger, acquisition or private equity buyout, involves understanding the risks and rewards of concentrated equity holdings. Proper planning ensures you can maximize the value of your equity while minimizing risks such as tax implications and market fluctuations. Here, we’ve outlined a three-step approach, covering essential actions to help you prepare fully, regardless of the type of financial transaction you’re navigating:
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Step 1 |
A successful liquidity event requires a coordinated effort from a team of experts who can provide specialized guidance in key areas such as long-term financial planning, tax planning, estate planning and investment management. Engaging your team early will ensure you have the right advice and strategies in place before making any major decisions. This team should include a wealth manager, estate planning attorney and tax advisor. Together, they’ll provide the expertise needed to make informed decisions and optimize your financial strategy.
Your key actions:
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Examples IPO: Your A-team in action Let’s say you’re a senior executive at a fast-growing tech startup, and over the years, you’ve accumulated a significant amount of stock options and RSUs. As your company prepares for an IPO, you realize that this liquidity event could drastically change your financial situation. However, you also know that navigating this process on your own could be overwhelming and risky. Wealth manager as your quarterback Your first step is to connect with a wealth manager. Acting as your financial quarterback, the wealth manager helps you understand your personal values and financial goals. These provide critical context for the wealth manager to help your explore the potential impact of the IPO on your finances and coordinates with other experts to ensure all aspects of your financial life are aligned. Together, you’ll create a personalized investment strategy and develop a comprehensive financial plan for your future goals, such as buying your dream home, securing your retirement and achieving long-term financial stability. Estate planning attorney for efficient wealth transfer With the anticipated increase in your net worth, it’s crucial to protect your assets and ensure efficient wealth transfer in the future. Your wealth manager collaborates with your estate planning attorney to create or update your will and, when appropriate, establish a living trust to ensure your assets are managed according to your wishes. This team approach simplifies the estate planning process, aligning all elements with your long-term financial goals to provide for your family in case of unforeseen events. Tax advisor for minimizing liabilities Your wealth manager and tax advisor work together to help you navigate the tax implications of exercising stock options and selling shares post-IPO. By coordinating the timing of these transactions, they can minimize tax liabilities, preserving more of your hard-earned wealth. This collaborative team also helps explore tax-efficient strategies, including charitable giving, so you can make the most of your wealth in alignment with your personal and philanthropic goals. Additional advisors for specialized needs As the IPO date approaches, you might consult with a philanthropy advisor if you’re considering substantial charitable contributions. These advisors can help identify and vet charitable organizations to ensure your gifts align with your values and make a meaningful impact. Meanwhile, your Aspiriant team, including your wealth manager and tax advisor, will help structure your gifts—whether in cash, stock, or other assets—and determine the most effective giving vehicles, such as a donor-advised fund or private foundation. For other post-IPO goals, like purchasing a new home, your wealth manager works with you to integrate these plans into your broader financial strategy, helping you make informed decisions that align with your long-term financial objectives. The outcome By assembling a team of experts well before the IPO, you can navigate the complexities of your liquidity event with confidence. Your wealth manager ensures that your financial strategy is comprehensive and aligned with your goals, your estate planning attorney protects your assets, and your tax advisor minimizes your tax burden. With the guidance of additional advisors, you make informed decisions about charitable giving and personal goals, like purchasing a home. Ultimately, you secure your financial future and achieve the lifestyle you envision. |
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Step 2 |
Planning for a liquidity event isn’t just about numbers; it’s about aligning your finances with your life aspirations. This significant transition can be both exciting and overwhelming, so it’s essential to address both the practical and emotional aspects of your wealth. From minimizing taxes to managing newfound responsibilities, understanding your vision will shape the roadmap for your financial future. By thinking holistically, you can ensure that your plan supports your personal values, long-term goals and financial security.
As part of our Total Wealth Management service, we discuss your investment strategy that is aligned with your dream life.
But it’s also important to understand that financial planning is an ongoing process—not a one-time event. As your life evolves post-liquidity, your financial plan should adapt with it, ensuring you remain on track to achieve your long-term objectives. That’s where a comprehensive financial planning process becomes invaluable.
Your key actions:
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After a liquidity event, many professionals ask, “What’s next?” Feeling too young to retire? You may need a new vision. |
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Step 3 |
Tax planning is a crucial part of managing your wealth—especially if you have multiple layers of taxes to consider. Without careful planning, you could end up paying more than necessary, which could affect your long-term financial goals. When it comes to equity compensation, the stakes can be even higher, particularly in states with high tax rates like California.
For example, when your restricted stock units (RSUs) vest, they’re treated as ordinary income, meaning they could push you into a higher tax bracket. This is why it’s important to ask questions like, “How much tax will I owe when my RSUs vest?” and “Should I sell the shares right away or hold on to them for potential growth?”
Plus, there are several advanced tax strategies to consider that can help you optimize your financial outcome during a liquidity event:
By working with your financial advisor and tax professional, you can develop a strategy that not only minimizes taxes but also helps you make the most of your equity compensation. This could include timing stock sales to optimize tax rates or diversifying your portfolio in a tax-efficient manner. In the end, thoughtful tax planning ensures you keep more of what you’ve earned while supporting your long-term financial vision.
Key actions:
Plan the timing: Work with your wealth manager and tax advisor to strategically plan when to exercise stock options and sell shares, with attention to your broader financial goals. While timing can impact your tax liability, it’s equally important to consider how your net proceeds will be used, your confidence in the stock’s future performance, and your need for diversification. In some cases, exercising early and holding shares for more than a year may qualify you for the lower long-term capital gains tax rate, but this approach only makes sense under specific conditions.
For California residents, all capital gains are taxed as ordinary income at the state level, which means timing considerations need to account for both state and federal taxes. Aligning your stock transactions with your financial goals and anticipated income can help you manage your tax exposure. For instance, spreading sales over multiple years may help prevent income spikes, while bunching transactions into a single year could offer other advantages. Working with your advisory team can help ensure your decisions are well-balanced across tax and personal financial objectives.
| Be aware of AMT: Exercising ISOs can trigger AMT, a parallel tax system designed to ensure high-income individuals pay a minimum level of tax. Stock option planning is highly nuanced, and while AMT may not always be avoidable, proactive planning can help manage its impact and avoid unexpected tax liabilities. Working with your tax advisor can provide clarity on when exercising ISOs aligns best with your financial strategy.
ISOs vs. NQSOs: While ISOs may qualify for long-term capital gains tax treatment at the federal level, they can also trigger AMT if not carefully planned. NQSOs, in contrast, are taxed as ordinary income upon exercise. Your wealth manager can help you navigate the tax implications of each type of option and integrate them into your broader financial strategy, ensuring alignment with your long-term goals. |
Why this matters: Charitable giving is, first and foremost, about making a meaningful impact on causes close to your heart. Integrating philanthropy into your financial plan can also help you manage tax considerations—providing savings that let you direct more resources toward the organizations and issues you value most. By working closely with your wealth manager, you can craft a charitable strategy that aligns with both your philanthropic and financial goals.
And don’t forget…
Set aside some “fun money”: Amidst all the spreadsheets, tax strategies and serious financial planning, it’s easy to forget that wealth is also meant to be enjoyed. So go ahead—give yourself permission to splurge a little! Whether it’s that dream car you’ve always wanted, a luxurious vacation to an exotic locale a new hobby that you’ve been itching to explore or even making a generous gift to someone you care about who could use a boost, setting aside some fun money is about more than just spending—it’s about celebrating an incredible milestone in your life.
The decisions you make after a liquidity event are just as pivotal as those leading up to it. One of the first steps after a liquidity event is managing your concentrated stock or concentrated equity to diversify and protect your wealth. A well-executed wealth preservation after a liquidity event strategy, coupled with effective risk management for concentrated stock holdings, ensures your wealth is secure in the long term. This process involves diversification strategies that spread your risk across various asset classes like real estate, bonds and private equity.
Here’s how you can continue to take care of your financial future:
Now that your liquidity event is behind you, it’s time to think beyond the concentrated stock that may have brought you here. A crucial next step is diversifying your investments across different asset classes—like stocks, bonds, real estate and private equity. This strategy spreads out risk and creates a balanced portfolio designed to meet your income needs today while fueling growth for the future. Your wealth manager will work with you to tailor this diversified portfolio to your unique goals, ensuring it aligns with your risk tolerance and long-term objectives. This approach not only protects your financial well-being but also positions you to enjoy the lifestyle you’ve envisioned for years to come.
Why this matters: Holding onto concentrated stock can feel comfortable, especially if it’s been the source of your success. But diversification is key to reducing risk and creating a more stable financial future. By spreading your investments across various asset classes, you’re better equipped to weather market fluctuations and pursue new opportunities, all while maintaining the income you need to live the life you’ve imagined.
A significant increase in wealth can bring new risks, making it more important than ever to protect what you’ve earned. This isn’t just about insurance—it’s about peace of mind. Reviewing and updating your property, casualty and umbrella insurance policies will help ensure they reflect your current financial situation. Additionally, setting up trusts and other entities can provide a layer of protection for your assets, ensuring that they’re transferred according to your wishes and shielded from potential creditors.
As your financial profile grows, so does your visibility, which can make you a target for identity theft or fraud. Consulting with security experts to enhance both your personal and digital security is a proactive step in safeguarding your identity and protecting your home. By taking these precautions, you’re not just securing your wealth—you’re securing your future.
Why this matters:
Wealth brings freedom, but it also comes with responsibility. Protecting your assets and identity ensures that your financial success isn’t overshadowed by unexpected risks. By staying ahead of potential threats, you can enjoy the rewards of your hard work without unnecessary worry.
A liquidity event is a significant milestone that often signals a new phase in your financial journey. Your estate planning should also consider the value and structure of your equity compensation, ensuring it aligns with your broader financial goals. This makes it the perfect time to revisit your estate planning documents, including wills, trusts and powers of attorney. As life changes—whether through marriage, the birth of a child, or simply a shift in your financial circumstances—your estate plan should evolve too.
Post-liquidity, it’s also an opportunity to consider incorporating advanced estate planning strategies, like trusts for wealth transfer, which can help minimize tax exposure and maximize the value passed on the heirs. Estate planning for high-net-worth individuals can ensure that your newfound wealth is managed efficiently and according to your long-term goals. Establishing tools like Grantor Retained Annuity Trusts (GRATs) and Charitable Remainder Trusts (CRTs) can also help minimize tax exposure and maximize the value passed on to heirs or charitable causes.
Why this matters:
Advanced estate planning techniques like GRATs and CRTs help high-net-worth individuals protect their wealth from excessive taxes and ensure it transferred efficiently. By incorporating these strategies, you not only secure your financial legacy but also make meaningful contributions to charitable causes if desired.
Wealth management is an ongoing process that requires continuous attention and adjustment. As your life evolves and market conditions change, revisit your financial plan to ensure it remains aligned with your goals. Regular reviews with your wealth manager are essential to keeping your financial strategy on track. These meetings allow you to reassess your portfolio’s performance, consider new opportunities and adjust your plan as necessary to stay on course toward your long-term objectives.
Navigating a liquidity event can be complex, with decisions that have far-reaching implications for your financial future. But you don’t have to go it alone. Our team of dedicated financial professionals at Aspiriant is here to guide you through every step—from understanding what’s most important to you and the impact your liquidity event has on that to crafting a personalized strategy that considers market conditions, tax implications and your unique financial goals.
Ready to take control of your financial future? Let us help you turn this pivotal moment into a powerful foundation for lasting wealth.
For employees:
Are you an employee facing your first IPO? Schedule a consultation to discuss and explore tax-efficient strategies.
For founders and executives:
For founders and executives, our team specializes in liquidity event planning to protect and grow your wealth. Let us help you navigate the complexities and secure your legacy.
For those exploring exit strategies:
Planning an exit? Our experienced team can help you develop a comprehensive strategy that aligns with your long-term financial goals while minimizing tax burdens.
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10b5-1 Plan 83(b) Election Acquisition Alternative Minimum Tax (AMT) Alternative Investments Asset Protection Asset Sale Capital Gains Capital Gains Tax Charitable Remainder Trust (CRT) Concentrated Equity (or Concentrated Stock) Diversification Diversified Portfolio Donor-Advised Fund (DAF) Equity Compensation Estate Planning Exercise (Stock Options) Exit Strategy Initial Public Offering (IPO) Incentive Stock Options (ISOs) Liquidity Event Lock-up Period Long-Term Capital Gains Tax Mergers and Acquisitions (M&A) Non-Qualified Stock Options (NQSOs) Ordinary Income Tax Philanthropy Advisor Private Equity Buyout Qualified Small Business Stock (QSBS): A special class of stock that offers tax advantages under the U.S. Internal Revenue Code. If certain conditions are met, holders of QSBS may exclude up to the greater of $10 million or 10 times the adjusted basis from federal capital gains taxes on the sale of their stock. Recapitalization Restricted Stock Units (RSUs) Secondary Market Sale Stock Options Tax Advisor Tender Offer Trust Umbrella Insurance |
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