Granted a bunch of stock pre-IPO for a company that exceeds expectations in the stock price sounds great, right? Yes, however, with all that newfound money comes the potential for significantly higher tax consequences. Non-Qualified Options (NQO) or Incentive Stock Options (ISO) liquidated immediately trigger income tax versus a more favorable long-term Capital Gains tax.
Along with the potential tax implications, around 70% of the client’s overall portfolio was in the husband’s company’s stock, creating a lack of diversification and increasing risk in the portfolio. Lastly, because of his role and insider knowledge the client must utilize an executive trading plan or 10B5-1 plan to dispose of his options.
A 10B5-1 plan allows employees to structure their sales in a few ways, but most commonly as a pre-determined prices and points in time utilizing Limit Orders and target dates typically around the stock’s vesting schedule and client’s tax bracket.