When does the tax bill on your equity get decided? You may think it is the day you finally sell and the cash lands in your account. Don't be so sure. By the time most people sell, the size of the bill was settled years earlier, by choices they did not know they were making.
That is the uncomfortable truth about employee equity at a company headed for an IPO. For a lot of people it becomes the largest financial decision of their lives, and it is one of the easiest to fumble, because the moves that matter most happen before there is a dollar of cash in hand. Worse, a good number of them cannot be undone once the window closes. The clock is often running before anyone tells you it started.
This guide walks through the three forms of equity you are most likely to hold and the decisions that surface at each stage:
- while the company is still private,
- as the IPO approaches,
- and once the stock trades publicly.
We are not going to pretend there is one right answer that fits everyone. What we can do is show you the levers you actually control, so that by the time we sit down together you are choosing on purpose, not reacting to a number you never saw coming.
One idea is worth putting up front, because it runs through everything that follows: the most valuable moves tend to come early, while the company is still private and the numbers are still small, and several carry hard deadlines. The clearest case is the 83(b) election, a one-page filing with a strict 30-day window that can save the right person a great deal of tax. We cover it in full in Stage One. If you are about to early-exercise options or receive restricted stock, raise it with us now, not later.
The Three Building Blocks
Almost all equity compensation at private companies comes in one of three forms. They are taxed differently, and the differences drive nearly every planning decision that follows.
Incentive Stock Options
The right to buy company stock at a fixed price (the strike). ISOs carry a real tax advantage: if you meet two holding requirements, your entire gain is taxed at lower long-term capital gains rates. The catch is that exercising them can trigger the Alternative Minimum Tax, which we cover in detail below. ISOs are the most planning-intensive of the three, and also the most rewarding when handled well.
Non-Qualified Stock Options
Also the right to buy stock at a fixed strike, but without the special tax treatment. When you exercise, the difference between the strike and the current value is taxed as ordinary income, just like salary. Simpler than ISOs, and more predictable, but generally less tax-efficient.
Restricted Stock Units
A promise to give you shares once conditions are met. You do not buy anything. RSUs are always taxed when they vest, at the full value of the shares as ordinary income. The wrinkle is what counts as vesting. Many private companies build in a double vesting requirement: the shares are not considered vested until you have both served the required time and the company has had a liquidity event such as an IPO. Because the tax happens at vesting, that second requirement pushes the entire tax event out to the year of the IPO, which is why RSUs so often create a large, concentrated tax bill the year a company goes public.
Why the differences matter
Options give you a choice about when to act, and that choice is where most of the planning value lives. RSUs largely take that choice away: the tax event happens when the shares settle, whether you are ready or not. The double vesting requirement on private-company RSUs is actually built to protect you. Without it, you could owe ordinary income tax on illiquid shares you have no way to sell to pay the bill. Tying the tax to a liquidity event means the cash to cover it generally arrives around the same time. Knowing which buckets your equity falls into is the first step, and your grant documents will tell you. If you are not sure, send them to us and we will sort it out together.
Stage One: While the Company Is Still Private
Years before any liquidity
This is the quietest stage, and often the most valuable. The company's official valuation -- the 409A value -- is usually still low, so the gap between your strike price and that value (the "spread") is small. Small spreads are a gift, because acting while they are small is what saves the real money later. The trouble is that nothing feels urgent yet, so this is exactly the stage people skip.
Early exercising options
When the spread between your strike and the current value is small or zero, exercising your options early means little or no tax today, and it starts the clock on long-term capital gains treatment. The trade-off is real: you are spending cash to buy stock in a company that may never go public, and that money is at risk. This decision comes down to your conviction, your cash position, and how much you can afford to lose.
The 83(b) election
If you early-exercise options before they have vested, or you receive restricted stock outright, you have 30 days to file a one-page election with the IRS called an 83(b). It tells the IRS to tax you now, on today's tiny value, rather than later as the shares vest at a much higher value. Missing the 30-day window is one of the most expensive paperwork mistakes in equity planning, and it cannot be fixed after the fact.
What to be doing now
- Confirm exactly what you hold, including strike prices, grant dates, and vesting schedules.
- Track the company's most recent 409A valuation, since it sets the cost of exercising.
- Decide, deliberately, how much capital you are willing to put at risk on a company that is not yet liquid.
- If you ever early-exercise, calendar the 83(b) deadline the same day. Thirty days, no exceptions.
Stage Two: As the IPO Approaches
The twelve to twenty-four months before going public
This is when the stakes climb in a hurry. The valuation is rising, and the spread on your options is widening with it. These are the decisions we spend the most time modeling with clients. Two of them dominate: how to handle the AMT when you exercise ISOs, and how to brace for the wave of RSU income an IPO can let loose.
ISOs and the Alternative Minimum Tax
Exercise an ISO and hold the shares, and you owe no regular income tax on the spread. The catch is that the same spread gets counted under a parallel tax system, the AMT. Exercise a large block in a single year and the AMT can hand you a sizable bill, even though you have not sold a share or seen a dollar of cash.
The AMT is not a penalty, and the money is not gone for good. What you pay generally turns into a credit you can recover in later years. But it is real cash out the door in the year you exercise, and it is far better planned for in advance than discovered the following April.
There are two separate figures, and they do different jobs:
The exemption is the amount of AMT income shielded before any AMT applies: $140,200 for married couples filing jointly and $90,100 for single filers in 2026. Above it, AMT income is taxed at 26%, rising to 28% above $244,500.
The phaseout threshold is the income level where you start losing that exemption: $1,000,000 of AMT income for joint filers ($500,000 single). So everyone gets the $140,200 to start, but once income climbs past $1,000,000 the exemption gets clawed back, and beginning in 2026 it disappears twice as fast as before. A high earner well above $1,000,000 effectively gets little or no exemption, which is what makes a large ISO exercise more painful than it used to be.
The central ISO question is how many options to exercise in a given year. Exercise too many and you manufacture an AMT bill you have to fund out of your own pocket. Exercise too few and you leave long-term capital gains treatment sitting on the table. The usual middle path is to exercise up to the point just before the AMT starts to bite, then keep going in later years, spreading the spread across several tax years. Whether that is right for you turns on your other income, the cash you can spare, and your conviction in the stock.
A more realistic illustration
An employee holds 60,000 ISOs at a $3 strike. The latest 409A value is $28, so the spread is $25 per share, $1,500,000 in total if all are exercised at once.
Exercising everything in one year piles $1,500,000 of spread onto AMT income. That not only generates AMT on the spread itself, it pushes the employee well past the $1,000,000 phaseout, stripping away most of the exemption and exposing nearly all of it to the 28% AMT rate. The result can be an AMT bill in the mid six figures, due next April, with no shares sold and no cash received to pay it.
Splitting the exercise across, say, four years keeps each year's spread far lower, preserves more of the exemption each year, and still moves every share into long-term capital gains treatment once the holding periods are met. Same 60,000 shares, a dramatically smaller and more manageable tax cost, driven entirely by timing. The right number of tranches depends on the rest of your tax picture, which is the sort of thing we work out together.
Getting ahead of RSU income
If you hold double-trigger RSUs, an IPO is the second trigger. The full value of your vested RSUs becomes ordinary income in that year, often a very large amount stacked on top of your salary. Two things follow that catch people off guard:
- Withholding is usually not enough. Employers withhold federal tax on RSU income at a flat 22% supplemental rate, and they are required to withhold at 37% on any supplemental income above $1,000,000 in a year. That sounds like a lot, but for a large IPO-year event even the 37% mandatory rate can fall short once state tax and your true top bracket are added in. The gap between what was withheld and what you actually owe can be substantial, and it is due the following April.
- Your income spikes in one year. This can affect everything from your tax bracket to Medicare surtaxes to phaseouts you have never had to think about. Knowing the number in advance lets us set aside the right amount and look for offsetting moves.
Stage Three: After the Stock Is Public
From the IPO through the lockup and beyond
Once the company is public, the question changes. It is no longer "when can I act" but "how much of this do I want to keep." For most employees, the feature that shapes everything in this stage is the lockup.
The lockup period
Most IPOs come with a lockup, commonly around 180 days, during which insiders and employees cannot sell. So you may face a large, taxable RSU event at the IPO while you are still barred from selling a single share to pay for it. The stock can swing hard in either direction over those months, entirely outside your control. Planning for the lockup is really planning for the gap between when the tax comes due and when you can actually raise cash.
There is often a way to bridge that gap. If the timing lines up and your situation allows it, you may be able to get liquidity from your post-IPO shares to cover the tax, either by selling some once the lockup lifts or, in the right circumstances, by borrowing against the position in the meantime. Neither is automatic, and both depend on your company's rules and your own balance sheet, but it is worth raising early so you are not caught flat-footed when the bill arrives.
Hold or sell?
After the lockup lifts, the core question is how much of your net worth you are comfortable leaving tied to a single stock, which also happens to be your employer. Two risks sit in the same basket: your investments and your paycheck both depend on one company. There is no universal answer, but a few principles help:
- Selling shares you acquired through RSUs or NQSOs at the IPO usually triggers little additional tax, because you were already taxed on that value as income. Your cost basis is the price at vesting, so selling soon after means a small gain or loss.
- Shares from exercised ISOs are different. Holding them long enough to meet the qualifying-disposition rules converts the gain to long-term rates, which can be a meaningful saving worth waiting for.
- Concentration risk is as much a feeling as a number, and we dig into it just below. The short version: the size of the position should be a decision, not an accident.
The qualifying disposition for ISOs
To get the full tax benefit of ISOs, you generally need to hold the shares at least two years from the grant date and at least one year from the exercise date. Meet both and your entire gain above the strike is taxed as long-term capital gain. Sell too early (a "disqualifying disposition") and part of the gain is pulled back into ordinary income. As the lockup lifts, it is worth knowing exactly where each lot sits relative to these dates before you sell.
Managing a concentrated position
This deserves real attention, because it is where many newly liquid employees stumble. After an IPO you may find that a single stock, your employer's, makes up the majority of your net worth. That is a fragile place to be, and the reasons to address it are worth saying plainly:
- Your income and your investments share one fate. If the company struggles, your shares and your paycheck can fall at the same time, exactly when you can least afford it.
- A single stock is simply riskier than a diversified portfolio. Individual companies can lose most of their value and not recover. Spreading the risk is the closest thing to a free lunch in investing.
- Your goals usually do not require the bet. Once a position is large enough to fund your life, continuing to hold all of it risks a future you do not need in order to chase upside you do not need either.
The good news is that you have choices, running from simple and broadly useful to sophisticated and reserved for very large stakes:
- A disciplined selling schedule: selling a set amount on a set cadence over time, rather than trying to pick the top. Even if you are not a corporate insider, putting selling on autopilot takes the emotion out of it, which is usually the hardest part. For those who are insiders (executives, directors, and other employees who may hold material nonpublic information), a formal 10b5-1 plan does the same thing while also providing a legal defense for trading during closed windows. If you are not an insider, you can capture most of the benefit, the discipline, without needing the formal plan at all.
- Giving appreciated shares: donating stock you have held long enough, often through a donor-advised fund, lets you sidestep the capital gains tax on the donated shares while funding causes you care about. One of the cleaner ways to trim a position if you are already charitably inclined.
- Collars: using options to set a floor under your downside, paid for by capping some of your upside. In our view a collar is a sensible default for protecting a large position through a volatile stretch without selling it: the upside you give up is what helps pay for the insurance, so a collar can often be structured to cost little out of pocket, sometimes close to nothing, depending on how the terms are set. If you would rather keep all of your upside, you can instead simply pay for the downside protection directly. Either way you are buying insurance; the main question is how you pay the premium.
- Variable prepaid forwards: an agreement to deliver a variable number of shares at a future date in exchange for a large cash advance today, often around 75 to 90 percent of the current value. In plain terms, you get most of your cash now, keep a slice of future upside up to a cap, and hand over shares later to settle. It can provide liquidity and some downside protection at once, but it is complex and, like collars, may be restricted by your company. We would only reach for it in specific situations.
- Exchange funds: pooling your concentrated stock with other investors' concentrated positions to receive a diversified basket back, deferring the tax along the way. The idea is elegant, but these funds carry meaningful costs, multi-year lockups, and real complexity, and they are not the right answer for most people. We mention them mainly so you recognize the pitch when you hear it.
The right answer usually pairs a steady selling discipline with whatever protection genuinely fits the size of your stake. Two of our other pieces go deeper on tools that come up here: our note on box spread lending (a low-cost way to borrow against a portfolio, useful when you need liquidity but do not want to sell) and our note on long/short extensions (a tax-aware way to manage a concentrated, highly appreciated position). Ask us for either if your situation calls for it.
If there is one question that should anchor everything in this stage, it is this: how much of this position could disappear before it would actually change your life? Sleep on that number. It matters far more than where the stock traded last week.
We understand the instinct to hold. For many of you, watching this stake grow has been the lived experience of building real wealth, and it is hard to step off a ride that has only gone up. But be honest about the world you are in now. So much value in today's companies accretes while they are still private, long before the public ever gets a look. The era of buying an Amazon at a sub-billion-dollar IPO and riding it for decades is not the base case anymore. The upside you are holding out for may already be behind you, sitting in the shares you own. That is not a reason to sell everything tomorrow; it is a reason to decide deliberately rather than by default.
Putting It Together
One idea runs through all three stages: the decisions worth the most are the early ones, made while you still have choices, and a good number of them cannot be walked back. The good news is that none of it is complicated once it is laid out in front of you.
| Stage | The decision that matters most |
|---|---|
| Still private | Whether to exercise early while the spread is small, and never missing an 83(b) deadline. |
| Approaching IPO | How many ISOs to exercise each year to manage AMT, and setting cash aside for the RSU income spike. |
| After going public | How much single-stock risk to keep, and meeting the ISO holding periods before selling. |
You do not have to sort through this alone, and none of it should be improvised at the filing deadline. The technical part is the easy part once it is laid out: bring us your grant documents and your own honest guess about where the stock might go, and we will work through the real numbers and the paths side by side.
But there is a harder piece of homework, and it is the one most people skip. Before the mechanics, take a long look in the mirror. A liquidity event like this can be genuinely life-changing, and money of that size tends to arrive faster than the wisdom for what to do with it. So ask yourself the real questions. What is this wealth actually for? What does enough look like for you and the people you love? What would you regret not doing, and what would you regret risking? The tax strategy should serve those answers, not the other way around. We have found that the clients who sit with these questions first, before a single share is sold, are the ones who look back years later and feel they got it right. We are glad to be a sounding board for that part too. It is, quietly, the most important part.
