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Greg, also a tech lead who joined Pinterest a little later:
Alright, some details on how to interpret this data. It's based on real people, but their names and numbers are anonymized. It's assuming they all sold their shares on the first possible day after the IPO, when the share price was $24.27.
2. Request exercise financing
San Francisco native (yes, really). @uw and Lowell High alum. I like to nerd out on fintech, stock options and taxes.
Are you wondering how to maximize your employee stock options before your company’s IPO? Whether you’re holding Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs), there are strategic tax planning steps you can take to reduce taxes and optimize long-term capital gains. Here’s what you need to know.
First, you have a choice:
Wait until the Initial Public Offering (IPO) to exercise your stock options and pay ~51 percent in taxes once you sell your equity...
OR
Exercise your stock options before the IPO and only pay ~35 percent in taxes.
This is due to a U.S. tax rule called long-term capital gains.
The gist: money you make selling stock you’ve owned for at least 12 months is taxed more favorably. So if you exercise now, you can have that tax savings unlocked by the time you can finally sell your shares after the IPO.
(More details on long-term capital gains further on in this article.)
Pinterest went public in 2019. After the usual 6-month lock up period, employees could sell their equity in October.
Here’s what three of them earned with- versus without exercising their pre-IPO stock options.
Cecile, an early software engineer at Pinterest:
Freya, a Pinterest tech lead:
Of course, the data may not be representative of how well other shareholders fared. There's no guarantee of future performance or success. In fact, some private companies may never even IPO or exit.
If you're looking to unlock long-term capital gains, all you have to do is exercise your pre-IPO stock options. You just need to decide whether it’s worth it.
It’s a trade-off: you invest the costs of exercising today, so you can earn much more in the IPO.
To make the call, you’ll want to do a bit of financial planning. What’s the difference between long-term capital gains and what would it cost for you to exercise?
In summary, if you want to plan for the upcoming IPO, there are three steps:
As you can see from the Pinterest examples, the specific numbers differ from person to person. It depends on whether you have NSOs and/or ISOs, their strike price, your personal details, etc.
What you want to know is the net difference: what would your IPO gain be with versus without long-term capital gains?
That calculation is complicated, so we built Maeve, Secfi's AI equity assistant. Maeve is purpose-built for equity, combining the flexibility of AI with the reliability of Secfi's tax calculation engine. It models exercise timing and long-term capital gains scenarios so you can see the net difference in your IPO gain. It looks like this:
Just sign up for a Secfi account to start using Maeve. It's free.
Liked what you saw in step #1? Then you can exercise to start the 12-month clock for unlocking long-term capital gains.
But exercising stock options isn’t free, so you have to know what it’ll cost you.
Beyond the exercise price, exercising also comes with a tax bill. That’s because when you’re buying shares at a low price (which is what exercising is), you’re considered to be making a ‘phantom gain’ (assuming strike price < 409A valuation).
The tax you owe depends on many factors: your type of employee stock options, the current 409A valuation (also known as fair market value), your salary, etc. If you have ISOs, there's the dreaded and complicated alternative minimum tax.
This is another complicated calculation, so let Maeve crunch the numbers for you. It runs the scenario against Secfi's tax calculation engine to estimate what exercising will actually cost:
Just share your details and Maeve returns your total exercise cost, including taxes like the AMT you may owe on your ISOs.
If you signed up in the previous step, Maeve is two clicks away.
Decision time. Are the tax savings computed in step #1 worth the upfront investment of paying your exercise costs as computed in step #2?
Then it could be time to exercise your stock options.
Here’s how to make sure you’re not missing anything:
Especially if you’re an early employee, the exercise tax bill can be hefty.
If this puts exercising out of your financial reach, there are two things you can do:
Another solution is to do a mix of the two: exercise as many stock options as your personal budget allows, then have Secfi fund the remainder.
Maeve is completely free to use.
We make money by funding option exercises. Here’s how it works:
The financing is non-recourse, which means your stock in the company is the only collateral. In other words, your personal money is untouched – you’ll never have to pay back more than what your shares sell for in the exit.
Also, your shares remain in your ownership all the way to the exit. (Employers are often happy to learn about this particular feature of our product, because that means they won’t have to transfer the stock to anyone else).
Since 2017 we’ve done this for hundreds of employees across 80+ tech companies, in Silicon Valley and beyond.
For example, we've helped employees of:
Read more about our financing options here.
Read more about our financing options here.
To see how exercise financing would pan out in your situation, we can send you a detailed proposal with all the numbers crunched. It’s free, no strings attached. Here’s how:
1. Sign up for a Secfi account
3. We invite you for a ‘we answer all your questions’ call.
Our process is largely automated, but we've found most folks like to discuss financing with a human. It’s a significant decision after all.
Secfi's Equity Strategists have helped hundreds of startup employees maximize the value of their stock options, and they're ready to explain anything equity and IPO-related. (By the way, just use the chat below if you'd like to have a chat with them before signing up ↘️)
4. We send you a detailed financing proposal.
The proposal is catered to your details. It models out your specific scenario and shows your benefit.
This last step normally takes 2-3 weeks, as our investment team does a risk assessment of the company.
However, if you work for one of our pre-approved companies (that includes most unicorns) we can skip this step and you’ll have the proposal in just days. You'll automatically see whether your company is pre-approved when you sign up.
If you're interested in exploring financing, you can sign up and request a proposal here.
TL;DR:
The specifics:
Money you make with stock options is normally taxed as ordinary income. But under the right conditions, it’s (partially) taxed as long-term capital gains. That’s a lower tax rate, meaning your gains could be higher.
These ‘right conditions’ are as follows. For both incentive stock options (ISOs) and non-qualifying stock options (NSOs), if you’ve owned the shares for at least 12 months, the difference between:
gets taxed as long-term capital gains. In other words, to unlock the tax savings, exercise 12 months prior to selling.
The ‘other part’ of your pre-tax gain, however, will still be taxed as ordinary income. So that’s the difference between
But that part you can get taxed as long term capital gains too, if:
If that’s all the case, your sale is a so-called qualifying disposition and your full pre-tax gain – so that’s the price at which you sell your shares, minus the strike price you’ve paid – will be taxed as long-term capital gains. This is the most advantageous scenario.
Phew! The complexity of the U.S. tax code never ceases to amaze.