This is a truly hypothetical situation to understand how one should approach some Pre-IPO companies. Let's say I'm joining a Pre-IPO company (let's say Slack for example) before it goes public. Let's say the current stock price in the private market is: $100. Let's say I'm offered 4000 RSUs, vesting over 4 years on a quarterly vesting schedule (to make calculations easier). 1000 units($100k) per year, 250 units ($25k) per quarter. So at the end of my first quarter, I will have 250 - 250*40% = 150 units (let's say company is withholding 40%). Based on this hypothesis, here is what I don't clearly understand: 1. I should have $25000 worth of RSU if the company has not gone public yet. Will I owe any taxes on thess $25k yet since I haven't entertained any capital gain yet? 2. If the company *did* go public after 2 months of joining, what will happen if the stock price fell 20% to $80 on IPO week, and hovered around 25% below the last private valuation to $75 after 6 months? (8 months after joining) Am I in a better position if I join in the Pre-IPO stage and the ipo goes sideways like LYFT and UBER? What will be the case if the IPO goes successfully like ZOOM? Sorry for a lot of hypothesis. I would really appreciate some serious guidance on any of these questions or if you can point me to good resources, that would be much appreciated too. (I'm researching on my own as well). Ideally if I can gather enough helpful information, I'd like to create an open source tool to help fellow engineers in similar situations. (Trolls are welcome too, just share the knowledge at least.)
For #1, Yes. You will pay taxes on the exercised stocks called ISO or RSU. For RSU u ll pay regardless , for iso u ll pay only if u exercise in the same year. For #2, you get number of stocks not value in $ amount. So if the stock goes down, u ll incur losses
#1 is a no since he hasn’t sold the stock. Most likely he hasn’t/shouldn’t have exercised the options
If he exercises but not sell, he ll still pay taxes. Its tricky when to exercise especially when u r close to ipo because after u exercise, u should wait 1 year before selling to avoid short term capital gain
“Let’s say”
Your RSUs will most likely have double trigger condition. Which means in addition to time vesting, it will also need some performance condition (like IPO or merger / acquisition) for the RSUs to be actually transferred to you. This would mean that you wont be taxed until IPO. However, on IPO date, all the stocks that have vested until then will actually be yours. From a tax perspective, you will have IPO price * number of vested RSUs until then, will be added to your ordinary income. They withhold taxes at some pre-defined rate and you'll get the rest. The risk with owning pre ipo stocks is if something like Lyft or Uber IPOs happen to you. If your withholding rate is lower than actual tax rate, and IPO price is much higher than price after lockup, you will owe a hefty sum come tax season. You'll end up selling a huge chunk of your RSUs to pay those taxes.
This makes sense. If the withholding rate upon IPO day is 35% what is the difference in percent one would owe? You say huge chunk, is that like an extra 10% to effective rate of 45% or even more?
It depends on the withholding rate. Typically, companies withhold around 20-25% for federal and 10% for state (in CA). If your effective tax rate is 37% federal and 13.3% state, you would owe 12%+ federal tax and 3.3% state tax.
It sort of does not matter too much how actual IPO goes as most packages have a one year cliff. A lot can happen in that time. See if you believe in the company and the role and act accordingly. Any IPO’ing company will have massive volatility for at least a year if not more (especially first 6-7 months)