orangehairfella
Recycles dryer sheets
- Joined
- May 28, 2015
- Messages
- 67
I was granted a significant number of ISO shares at a job years ago and was able to hold on to them post separation. Through the grapevine I've learned that the company is prepping for an IPO in the next 6-9 months. After the IPO I'd be subject to a 6 month lockup. My goal is to get rid of these and diversify.
My cost to exercise would be about $50k, and the profit, assuming the FMV stays stable and the stock doesn't "pop" would be about $500k, less taxes.
Pretending I can sells in 12 months (6mo to IPO + 6mo lockup), I could:
1) Exercise now by paying the $50k. I would be subject to AMT on the $500k, which is, well, a lot. For the next 11mo I'm out $50k and come April of next year $140k would be due in AMT. I'd be able to cover that with the sale soon after.
Questions: How does AMT play with long term capital gains in this situation? Does the 15% LTCG rate even apply since I'll have already paid 28% in AMT? We're assuming that the stock stay flat and that there's no additional gain over the bargain element. If I'm paying 28% already perhaps plan 2 makes more sense? The post tax with AMT is $360k, with LTCG its closer to $420k. My understanding is that I can recoup some of that AMT in later years, but it may take a decade+, and I'm effective getting a 0% return on that money in the mean time.
Risk: The IPO may delayed or even canceled. Delayed seems very possible knowing the process. I'm out the $190k from my portfolio until the IPO happens, the lockup expires and I can sell, thus its earning nothing in the meantime. I consider the cancellation risk low, but non-zero, I'd be out $190k possibly forever.
2) Hold the options, exercise and sell in a "single" transaction after the IPO. Gains would be taxed as regular income, netting me ~$300k. Little/no AMT hit since this taxed as regular income. This allows me to keep $190k invested and continuing to earn over the next 12 months.
Questions: This hinges on the above I suppose. $300k vs $360k is good chunk, but that additional $60k between $300k and $420k feels huge.
Risk: 100% change of leaving between $60k and $120k on the table, depending on how the AMT thing plays out. 0% chance of losing $190k.
3) Hold the options until IPO. Wait 12 months for LTCG. This way I know the stock will be worth something. Here again I'm out 50k for 11mo, and $140K for at least a short while depending on the difference between tax day and the 1 year anniversary of the IPO.
Risk: I have to wait an additional 6mo to get to LTCG after the lockup expires. The stock could drop, and this is common, very common, amongst newly public companies as institutional investors sell in an attempt to realize "pop" profits or mitigate losses.
4) Hold until IPO, sell after lockup expires. I see no upside here, this is the same as #2 except I'm out the exercise cost for 6mo, depending on timing I may still get hit with AMT and I still have to pay regular income tax when I sell, less AMT credit, I think?
Did I miss any scenarios? Is my understanding of the situation correct? Close? Way off?
My cost to exercise would be about $50k, and the profit, assuming the FMV stays stable and the stock doesn't "pop" would be about $500k, less taxes.
Pretending I can sells in 12 months (6mo to IPO + 6mo lockup), I could:
1) Exercise now by paying the $50k. I would be subject to AMT on the $500k, which is, well, a lot. For the next 11mo I'm out $50k and come April of next year $140k would be due in AMT. I'd be able to cover that with the sale soon after.
Questions: How does AMT play with long term capital gains in this situation? Does the 15% LTCG rate even apply since I'll have already paid 28% in AMT? We're assuming that the stock stay flat and that there's no additional gain over the bargain element. If I'm paying 28% already perhaps plan 2 makes more sense? The post tax with AMT is $360k, with LTCG its closer to $420k. My understanding is that I can recoup some of that AMT in later years, but it may take a decade+, and I'm effective getting a 0% return on that money in the mean time.
Risk: The IPO may delayed or even canceled. Delayed seems very possible knowing the process. I'm out the $190k from my portfolio until the IPO happens, the lockup expires and I can sell, thus its earning nothing in the meantime. I consider the cancellation risk low, but non-zero, I'd be out $190k possibly forever.
2) Hold the options, exercise and sell in a "single" transaction after the IPO. Gains would be taxed as regular income, netting me ~$300k. Little/no AMT hit since this taxed as regular income. This allows me to keep $190k invested and continuing to earn over the next 12 months.
Questions: This hinges on the above I suppose. $300k vs $360k is good chunk, but that additional $60k between $300k and $420k feels huge.
Risk: 100% change of leaving between $60k and $120k on the table, depending on how the AMT thing plays out. 0% chance of losing $190k.
3) Hold the options until IPO. Wait 12 months for LTCG. This way I know the stock will be worth something. Here again I'm out 50k for 11mo, and $140K for at least a short while depending on the difference between tax day and the 1 year anniversary of the IPO.
Risk: I have to wait an additional 6mo to get to LTCG after the lockup expires. The stock could drop, and this is common, very common, amongst newly public companies as institutional investors sell in an attempt to realize "pop" profits or mitigate losses.
4) Hold until IPO, sell after lockup expires. I see no upside here, this is the same as #2 except I'm out the exercise cost for 6mo, depending on timing I may still get hit with AMT and I still have to pay regular income tax when I sell, less AMT credit, I think?
Did I miss any scenarios? Is my understanding of the situation correct? Close? Way off?