You’ve been collecting stock options at your private company for years.
On paper, they look valuable.
But here’s the reality: those options have no realizable value until you have access to a market where you can sell them.
If you’re sitting on private company equity, here are some thoughts to help you turn those paper gains into real money.
The 4 Main Liquidity Events That Matter
1. Initial Public Offering (IPO) Your company goes public, and your shares can now be traded on the open market. However, there is typically lockup period (i.e. 6 months) where you can’t sell immediately after the IPO.
2. Merger or Acquisition Another company buys your company. Your options may convert to cash, stock in the acquiring company, or a combination of both, depending on the deal structure.
3. Tender Offer A private buyer (such as a private equity firm) offers to purchase shares directly from employees and shareholders. This could give you liquidity without a full sale or IPO.
4. Secondary Market Sale Some companies facilitate private sales where existing shareholders can sell to new investors. These are less common but becoming more frequent at later-stage companies.
The Critical Timing Decision
Here’s what many people miss: your stock options don’t automatically become money.
You still need to exercise them—meaning you pay the strike price to actually own the shares.
This creates a crucial decision point:
- Exercise before the event
- Exercise during the event
- Let them expire
Tax Implications You Can’t Ignore
Incentive Stock Options (ISOs)
- Exercising can trigger Alternative Minimum Tax (AMT)
- Timing your exercise around the liquidity event is advantageous
- The number of shares you exercise can impact your tax liability
Non-Qualified Stock Options (NQSOs)
- Taxed as ordinary income when exercised
- Simpler tax treatment but potentially higher rates
- Generally no AMT concerns
Your Action Plan
Before any liquidity event:
- Understand your vesting schedule – Know exactly how many options you’ll have
- Calculate your potential gain – Strike price vs. expected event price
- Model the tax scenarios – Work with your financial advisor and CPA
- Plan your cash flow – You might need money upfront to exercise
During the event:
- Try not to make emotional decisions based on excitement
- Stick to your pre-planned strategy
- Consider your overall portfolio allocation post-event
The Bottom Line
Owning private company equity can often be lucrative—but you’ll need to handle the transition systematically.
The difference between a well-executed liquidity event strategy and winging it… it can cost you in both tax liability and missed opportunities.
Most importantly: Start planning before the event happens. Once your company announces an IPO or acquisition, you may already be behind.
The strategies discussed are for informational purposes only and should not be considered tax or legal advice. Consult with your financial advisor, CPA, and attorney to develop a strategy specific to your situation. CRN202808-9260573
