03 Jun Your stock options are a success! Now what?
Madison, Wis. – In our last column, we looked at some things you should consider if you see an initial public offering or merger on the horizon, or even before. But the planning does not end with the IPO. In this column, we examine some of the issues that arise or continue after the initial success. Again, I’ve asked Chris Burque, a wealth management advisor at Merrill Lynch, to help guide us through the thought process.
In the post-IPO/merger time frame, you should consider several areas: contractual and regulator restrictions, your exposure to and management of holding a single-stock position, and your legacy with your family and community.
Contractual and regulatory restrictions
The IPO or merger is about to occur. You’ll sign all types of agreements and do a road show.
The most common agreement with an IPO is an underwriter’s lock-up. This will prevent you from doing any transaction for six months. Also, any gifts to trusts, charities, family or friends would have the same restrictions. These lock-ups help ensure a stable and orderly market for trading a new company’s shares.
Also, there may be regulatory restrictions. You might own shares that aren’t registered in the IPO or merger. You might not be able to trade your shares because you have material nonpublic information. Or you may become a top officer or director, subject to insider trading rules and black-out periods. All of these restrictions can act as barriers to action, making it easier for you to keep your concentrated stock position rather than acting in your best interest.
Remember the old saying, “Don’t keep all of your eggs in one basket.” That advice applies to your stock holdings as well.
Managing a concentrated stock position
Keeping a concentrated stock position can present unnecessary risk if the stock position experiences a sudden and unexpected drop in value. You should plan carefully to protect assets that are important to you, such as your home and a secure source of income. You’ll have the opportunity to sell shares, use the shares as collateral for a loan, diversify through sales or exchange funds and utilize derivatives to manage risk. You’ll want to create a diversified portfolio for your future goals.
And you may want other funds set aside for future ideas and aspirations. Also, this is the time to further transfer wealth to those in need, as low-cost basis stock can support philanthropic works and projects.
Those who start one company often have ideas to create other companies. The Internal Revenue Code has incentive tax treatments to promote the formation of new businesses. If you have received shares from an investment in a start-up company that meets the definition of a Qualified Small Business (QSB), you may be able to defer taxes when you want to invest in a new start-up.
One section of the IRC allows you to sell shares that have a QSB status (even though the company is no longer small) and reinvest within 60 days to create a new QSB while deferring taxes.
The philanthropic benefit flows out of the tax code. Low-cost basis stock can be utilized for charity, giving you a substantial tax deduction. You can make outright gifts to a single charity, to your charitable remainder trust, to a donor advised fund, or even to your own philanthropic foundation. If your success brings you a lot of income, possibly from the vesting of restricted stock or exercise of stock options, a charitable lead trust may also give you a substantial tax deduction.
In our last two columns, we’ve emphasized the need to think through and plan with stock options. The options grant is by no means the end, but just the beginning. Careful planning can help you leverage the value of your options to the highest level possible.
• Sverre Roang: Executive compensation: Besides stock options, what else is there?
• Sverre Roang: ISOs: What’s my option worth and when do I get it?
• Sverre Roang: What’s so incentivizing about the incentive stock option?
• Sverre Roang: Even with backdating backlash, classic stock option still in vogue
• Sverre Roang: The celebrated stock option: A Holy Grail for tech?
Christopher Burque CFP, CIMA, is a wealth management advisor in the Madison office of Merrill Lynch. He can be reached at Christopher_Burque@ml.com.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC.
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