Gusto IPO: What Gusto employees need to know about their 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.

What happens to Gusto employee stock options in an IPO?

If Gusto moves forward with an IPO, here’s what employees should consider:

• Your stock’s value could change significantly. An IPO will establish a public price, but market fluctuations are expected.
• A lock-up period will likely apply. Employees may have to wait six months or longer before selling shares.

Taxes will become a major factor. The IRS treats exercised stock options differently depending on when and how you exercise.

Understanding the value of your Gusto stock

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.

📌 Why?

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.

Scenario: A Gusto employee who joined in late 2021

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:

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.

Exercise now or wait for 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:

Option 1: Exercising early (before the IPO)

• Lower tax burden: Exercising at the current (assumed) FMV ($14) means their taxable income is much lower than if they wait.
• Long-term capital gains eligibility: If they hold the shares for at least a year, they qualify for lower long-term capital gains rates.
• More control over liquidity: No unexpected lock-up restrictions or IPO-driven tax surprises.

Breakdown of early exercise costs & taxes:

• Exercise cost: $406,250
• Taxes due at exercise (AMT impact): $247,074
• Estimated capital gains taxes at exit (assuming IPO price of $30.40): $487,000
• Total potential post-tax gain: $1.33M

Option 2: Waiting until after the IPO

• No upfront exercise costs—but face much higher taxes later.
• Uncertain market conditions—Stock prices could fluctuate post-IPO.
• Ordinary income tax applies—Potentially much higher than capital gains rates.

Breakdown of post-IPO exercise costs & taxes:

• Exercise cost: $406,250
• Tax burden at ordinary income rates: $1.02M
• Total potential post-tax gain: $1.04M

The key takeaway

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.

Final considerations: Market trends & timing

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.

Trends shaping Gusto’s stock value

• Peak valuation reached $30.40 per share (preferred price). This sets a benchmark for potential IPO pricing.
• 409A valuations have been trending upward, signaling increased investor confidence.
• If this trend continues, Gusto’s FMV will rise, meaning a higher tax bill for employees who delay exercising.

💡 What this means for you

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.

How Secfi can help

For many Gusto employees, the biggest barrier to exercising early is the upfront cost. That’s where Secfi’s non-recourse financing comes in:

• Exercise now—without tying up personal cash.
• If your stock doesn’t increase in value, you owe us nothing.
• Avoid AMT surprises with a personalized strategy.

What’s your next move?

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.

¹Source

²Last pref price as of 12/21/24, Private market data provided by Caplight.