Gusto IPO: What employees need to know about their stock options and taxes
6 min
San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
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San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
Gusto has achieved what many startups can only dream of—turning a profit, scaling its business, and becoming a dominant force in their sector. With 400,000 SMB clients1, a growing customer base, and a strong market position, IPO speculation is heating up.
For Gusto employees holding stock options, a potential Initial Public Offering (IPO) is an exciting milestone. It’s a moment that could unlock significant financial opportunities but also one that we believe requires careful planning to help maximize the value of your equity while minimizing taxes.
What you do now could make a big difference in how much of your equity you get to keep.
If Gusto moves forward with an IPO, here’s what employees should consider:
Taxes will become a major factor. The IRS treats exercised stock options differently depending on when and how you exercise.
Let’s assume Gusto’s Fair Market Value (FMV) is currently at around $14 per share, meaning employees can still exercise their options at a relatively low valuation. However, waiting until after the IPO could result in a significantly higher tax bill—even if Gusto goes public at the same price as its last funding round.
If Gusto has a flat exit at $30.40 per share (the last preferred price valuation2), then waiting to exercise could mean paying the difference between your strike price and the FMV as ordinary income - assuming a cashless exercise - potentially doubling your tax burden compared to exercising today
Gusto’s 409A valuation has also steadily increased over the past few years. If that trend continues, the FMV could rise before an IPO, making early exercise even more tax-efficient. Employees who exercise now lock in a lower tax basis while taking advantage of lower current valuations.
Let’s break this down with real numbers. For this example, we assume the employee started vesting Incentive Stock Options (ISOs) in December 2021 and is currently 81% vested, meaning they have 81,250 options with a strike price of $5 per share.
Here’s how their equity value stacks up based on the latest available data:
| Strike price | Most recent 409A (FMV) (Assumed) | Most recent pref price |
|---|---|---|
$5 | $14 | $30.40 2 |
| Total cost to exercise including taxes (81,250 options) | 409A valuation of exercised options | Preferred price valuation of exercised options |
|---|---|---|
$653,324 | $1,137,500 | $2,470,000 |
This means that if this employee exercises their stock options today, they would need $653,324 to do so, but their shares could already be worth anywhere from $1.14 million to $2.47 million, depending on the valuation method.
However, taxes can make a big difference in their final outcome, so let’s compare exercising now vs. waiting until after the IPO.
Assuming the FMV continues on its upward trajectory, employees who exercise now can establish a lower cost basis and potentially qualify for long-term capital gains tax rates, reducing their future tax burden. Meanwhile, employees who wait until the IPO to do a cashless exercise could face significantly higher ordinary income taxes on the difference between the FMV and their strike price.
Here’s a direct tax impact comparison for this employee, assuming they have a $250,000 income, live in California, are married filing jointly, and have no other income:
If this employee exercises now, they could save over $300,000, increasing their overall net gains by the same amount compared to waiting until the IPO.
The last 3–4 years have been a rollercoaster for private company valuations, shaped by shifting market conditions, investor sentiment, and public market volatility. These fluctuations have directly impacted secondary market pricing, offering insight into how companies like Gusto are valued ahead of a potential IPO.
If Gusto continues on its current trajectory, waiting could mean paying significantly more in taxes at a higher FMV. By exercising now, you lock in a lower tax basis, gain financial flexibility, and position yourself for long-term capital gains eligibility.
The best time to plan isn’t when an IPO is announced—it’s before it happens.
For many Gusto employees, the biggest barrier to exercising early is the upfront cost. That’s where Secfi’s non-recourse financing comes in:
An IPO doesn’t happen overnight. But when it does, you don’t want to be scrambling to figure out your stock options. Now is the time to plan.
We’re already working with Gusto employees to help them exercise early, reduce their tax burden, and take control of their equity.
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