How to handle 5M capital gain (post-IPO)

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Thegame14
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Re: How to handle 5M capital gain (post-IPO)

Post by Thegame14 » Wed Oct 16, 2019 2:52 pm

I would sell 90% of it, and let the rest ride, I would put it into money market for now and take some time to carefully think about your next move. Is this enough to retire early? is this enough to relocate to a lower cost area and a lower stress career? Is this time to have more kids? does wife want to stay home with more kids while you continue to work, etc.... I would opt for capital preservation and probably have an AA of something like 50% bonds 25% stocks 25% MM, and then figure out what you want to do with the rest of your life knowing money may not be an issue anymore.

RadAudit
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Re: How to handle 5M capital gain (post-IPO)

Post by RadAudit » Wed Oct 16, 2019 3:44 pm

ScaledWheel wrote:
Wed Oct 16, 2019 10:13 am
Depending on how long you've been gone, you know more about your former company's competitive advantage and position in the market than us. If it has had a good post-IPO trajectory, I would be inclined to "dollar cost average" out of your holdings in the next couple years, maybe holding a very small amount relative to your initial holdings at the end.

Congratulations on your hard work and good fortune!
Of course, congrats.

Not to start a cat fight, but, I would be careful about assuming what I knew about your company's competitive advantage. I'm not so sure the market cares about the competitive advantage as you see it at any point in time and may take a differing view for a very long time.
FI is the best revenge. LBYM. Invest the rest. Stay the course. - PS: The cavalry isn't coming, kids. You are on your own.

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fluter
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Re: How to handle 5M capital gain (post-IPO)

Post by fluter » Wed Oct 16, 2019 4:22 pm

AerialWombat wrote:
Wed Oct 16, 2019 2:38 pm
fluter wrote:
Tue Oct 15, 2019 11:26 pm
(Moving to a lower tax state is not a possibility for the next few years.)
Why not?

You never have to work another day in your life, as long as you manage this money properly. So quit your job and move.
Because I'm involved in a multi-year project that I feel personally committed to seeing through (and it requires me being in CA for a few more years). I feel that money should enable goals, not dictate them. And if I were to compare moving (and not paying CA tax) today and stopping work versus paying CA tax and working a few more years, the financial outcomes are probably not that different (given a few years of income vs not working). (If I wanted to quit my job ASAP it'd be a different story)

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fluter
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Re: How to handle 5M capital gain (post-IPO)

Post by fluter » Wed Oct 16, 2019 4:27 pm

RadAudit wrote:
Wed Oct 16, 2019 3:44 pm
Not to start a cat fight, but, I would be careful about assuming what I knew about your company's competitive advantage. I'm not so sure the market cares about the competitive advantage as you see it at any point in time and may take a differing view for a very long time.
Others may feel differently, but I don't assume I have any special knowledge of the future, and I'm sure the market is smarter than I am.

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AerialWombat
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Re: How to handle 5M capital gain (post-IPO)

Post by AerialWombat » Wed Oct 16, 2019 4:41 pm

fluter wrote:
Wed Oct 16, 2019 4:22 pm
Because I'm involved in a multi-year project that I feel personally committed to seeing through
Perfectly understandable. You know what's important to you.

In that case, I would suggest immediately selling off enough to get it down to whatever percentage of your portfolio you're comfortable still holding (and just eat the tax hit, since it's all "found money" anyway). Many Bogleheads would suggest not having more than 5 or 10 percent of your net worth in such a holding, if even that.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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fluter
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Re: How to handle 5M capital gain (post-IPO)

Post by fluter » Wed Oct 16, 2019 10:05 pm

fujiters wrote:
Wed Oct 16, 2019 10:18 am
I just want to echo the recommendations to look into options as a way to hedge to avoid selling it all in one year. See:

https://www.investopedia.com/articles/s ... sition.asp
Thanks for the suggestion (and link, I hadn't found that page). I will consider a couple (simpler) options strategies. But I met with a CPA and the total tax is basically the same if I sell in one year or spread over multiple years (at least for the 2-3 yr time horizon). I'm thinking of holding some until January 2020 so that I have more chance of harvesting some losses in the new year to offset the gain. So maybe an options strategy on a shorter time scale would make sense.

kxl19
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Re: How to handle 5M capital gain (post-IPO)

Post by kxl19 » Wed Oct 16, 2019 10:38 pm

I would definitely find out if any of your shares are qualified small business stock when you acquired them, as the fed cap gains is 0% if it was held more than 5 years from issue, and depending on your state, if it followed federal section 1202 exclusion, it could be 0% state too. I successfully used this strategy for my ISO that became valuable post IPO. In my case - the shares were already held for 5 years at the time of the IPO lockup expiration.

Another thing to consider is AMT - especially if you still have deep in the money options that are vesting and you’re exercising them. There’s a handy online calculator that’ll calculate the minimum number of ISO to exercise to avoid triggering AMT based on the strike price and the current market value. https://amt-calculator.com/

Regarding the options plays - many startups may have policies prohibiting you from doing cost less collars or selling calls for hedging. Ours did, because it could misalign your incentives to grow the company share price.

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fluter
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Re: How to handle 5M capital gain (post-IPO)

Post by fluter » Wed Oct 16, 2019 10:43 pm

LittleGreenSoldiers wrote:
Tue Oct 15, 2019 11:43 pm
Moving forward what does you're situation look like? Do you plan to stay with current startup employer or move on?
I plan to stay with my current employer for at least a few more years (I'm in the middle of a large project that I feel committed to seeing through, and I like my job), but may consider a change in a few years. (My current employer is not the IPO company.) So I'm not looking to immediate change, but this money could enable a lot of flexibility down the road.

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Re: How to handle 5M capital gain (post-IPO)

Post by AlphaLess » Wed Oct 16, 2019 10:47 pm

EnjoyIt wrote:
Tue Oct 15, 2019 11:50 pm
If I had 3 million in capital gains and had to pay huge amounts of state taxes, I would do everything in my power to legally move to a no tax state for a minimum 184 days of the year. This is especially true if I lived in California and 12.3% of it was to be taxed away.
3MM * .123 = $370K.

That is a lot of money, but so is the hassle of moving twice.

Not to mention if the person's employment and livelihood are in CA.

Also, if it were not for the residence in CA, this $3MM gain may not have existed.

It is cheaper (and probably tax-free) to live in Afghanistan, but you don't see any Americans moving there any time soon.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.

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fluter
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Re: How to handle 5M capital gain (post-IPO)

Post by fluter » Thu Oct 17, 2019 2:32 am

wolf359 wrote:
Wed Oct 16, 2019 9:08 am
I'm not sure if I'm the one who's off, but my numbers seem to be completely different than those being tossed around.
Wolf359, your numbers are correct (confirmed by CPA). The total tax bill, if I sold all shares in 2019, would be about 1.8M. Splitting over two years would spreads it out but not reduce the total in any meaningful way.

Valuethinker
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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Thu Oct 17, 2019 2:43 am

fluter wrote:
Wed Oct 16, 2019 10:05 pm
fujiters wrote:
Wed Oct 16, 2019 10:18 am
I just want to echo the recommendations to look into options as a way to hedge to avoid selling it all in one year. See:

https://www.investopedia.com/articles/s ... sition.asp
Thanks for the suggestion (and link, I hadn't found that page). I will consider a couple (simpler) options strategies. But I met with a CPA and the total tax is basically the same if I sell in one year or spread over multiple years (at least for the 2-3 yr time horizon). I'm thinking of holding some until January 2020 so that I have more chance of harvesting some losses in the new year to offset the gain. So maybe an options strategy on a shorter time scale would make sense.
The only options strategy that i know of that I think would work is to buy Puts on your own company stock:

- beware of insider trading rules - you probably need permission from your employer
- I don't believe there are put options available on most individual companies
- of course it is insurance and you win, with insurance, if it never pays off i.e. you lose money

I may be missing something, but that's my general understanding.

Valuethinker
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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Thu Oct 17, 2019 2:48 am

fluter wrote:
Wed Oct 16, 2019 10:05 pm
fujiters wrote:
Wed Oct 16, 2019 10:18 am
I just want to echo the recommendations to look into options as a way to hedge to avoid selling it all in one year. See:

https://www.investopedia.com/articles/s ... sition.asp
Thanks for the suggestion (and link, I hadn't found that page). I will consider a couple (simpler) options strategies. But I met with a CPA and the total tax is basically the same if I sell in one year or spread over multiple years (at least for the 2-3 yr time horizon). I'm thinking of holding some until January 2020 so that I have more chance of harvesting some losses in the new year to offset the gain. So maybe an options strategy on a shorter time scale would make sense.
My advice would be for that first $1m of stock sale? Do it now - today - you are 8 hours behind me so markets won't open in NY for another 7.5 hours. Plenty of itme.

You will pay ugly taxes, but it will give you cash sitting in a Money Market Fund. More capital than most people see in their lives (living in a coastal US state near NY or California or southern England distorts one's sense of reality because of the high paying professionals all around).

What you do not want to happen is a collapse - either in the stock market as a whole or the share price - and you had not taken money off the table.

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TomatoTomahto
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Re: How to handle 5M capital gain (post-IPO)

Post by TomatoTomahto » Thu Oct 17, 2019 5:05 am

AlphaLess wrote:
Wed Oct 16, 2019 10:47 pm
It is cheaper (and probably tax-free) to live in Afghanistan, but you don't see any Americans moving there any time soon.
That’s a line I’m going to repeat when people talk to me about leaving MA, which we love (for now, anyway) because of taxes.

OP, if the stock is thinly traded, space out the sales a bit, but the intent should still be to diversify as soon as is reasonable.
Okay, I get it; I won't be political or controversial. The Earth is flat.

dekecarver
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Re: How to handle 5M capital gain (post-IPO)

Post by dekecarver » Thu Oct 17, 2019 5:27 am

lws wrote:
Wed Oct 16, 2019 11:55 am
Congratulations on your windfall. Wealth should bring pleasure, not pain. Please make a wise decision and go enjoy life. You have made it.
This is true and I agree; if not careful it's like sitting at the gambling table with an exceptional run and thinking "that was easy, lets go for more". The only problem is that the house will eventually take it all back if you can't leave while the door is open. I'd look at the taxes as paying up front to play the game and now run like hell.

Valuethinker
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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Thu Oct 17, 2019 6:02 am

TomatoTomahto wrote:
Thu Oct 17, 2019 5:05 am
AlphaLess wrote:
Wed Oct 16, 2019 10:47 pm
It is cheaper (and probably tax-free) to live in Afghanistan, but you don't see any Americans moving there any time soon.
That’s a line I’m going to repeat when people talk to me about leaving MA, which we love (for now, anyway) because of taxes.

OP, if the stock is thinly traded, space out the sales a bit, but the intent should still be to diversify as soon as is reasonable.
It's hyperbolic. The choice is not California v Afghanistan (or even v. Canada, usually). It's California v AN Other American state. And that is probably not Mississippi (picked that one as the poorest state per capita in the Union, rather than out of any judgement against Miss. itself).

Life is a time. And that time is finite. If you have great ambition to leave money to your children, then accumulation of money matters. Money is otherwise just a tool to how you spend your finite amount of time on this planet.

Family. Doing useful and important work. Being part of your society more broadly via community or social groups or politics. Becoming an educated and cultured citizen. Supporting the good and the just wherever you can. Living the just life. That's what life is about.

If you die with too much money, you basically lost the game - you spent more time on your money than was actually justified.

NewMoneyMustBeSmart
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Re: How to handle 5M capital gain (post-IPO)

Post by NewMoneyMustBeSmart » Thu Oct 17, 2019 6:56 am

fluter wrote:
Tue Oct 15, 2019 11:26 pm
A company that I worked for when it was a very early stage startup had an IPO earlier this year. I've been holding restricted stock that is now liquid, and worth ~4.8M. After the IPO lock-out expired, I sold 30% to lock in some gain (and help myself sleep at night), and I'm trying to decide what to do with the rest (~3.3M left in stock). I want to diversify the concentrated position into index funds. The gain is long term, but I live in CA, so state taxes are steep. (Moving to a lower tax state is not a possibility for the next few years.)

I'm 36, married with one kid. My portfolio outside this position is ~1M, in a mix of index funds (Schwab) and short/mid term bonds. I don't have any debts, and don't own real estate.

I'd appreciate any thoughts on how you would approach this situation (maybe "problem" isn't the right word). Would you just sell over time and pay the tax? I have spoken with a couple advisors (fee-only, 1% AUM), who have recommended more exotic strategies such as exchange funds, opportunity zone funds, and covered calls. Up until now I have been a DIY investor following the BH philosophy (and have been happy with that). I'm trying to weigh the pros and cons of just selling and paying the tax versus paying an advisor to help minimize the tax.

Thanks,
Parker

Edit:
I have read the Wiki page on Managing a Windfall.
I'm in a similar discussion and have done a lot of research and discussions with individuals who will and have done this, professionals who advise, and various forums like this. That said, none of this is advice, I am not qualified to give advice, you should ignore me, and this is only what I might do, but I could change my mind.

Diversifying 1/3 is a great idea. Good for you for taking something off the table.

There are three major schools of thought on this:

REGRET MINMIZATION

Many of the RIAs I've spoken with who have managed money for years (>10 y) say that a lot of tech folks have regretted selling everything to watch the stock go up 200% in 1-3 years. So, if you follow this school of thought, perhaps keep some long term.

DIVERSIFY FOR DEAR LIFE (DODL)


Most folks on Bogleheads will recommend diversifying into total market/3-fund portfolio. This is not wrong. It is conservative.

MICROMANAGE RISK/ROI/TAX WITH MODERN PORTFOLIO THEORY


Perhaps you can/should analyze your possible choices. You might/ought pay some thousands of dollars to a CPA who understands ISOs/NQSOs/RSUs and tax, who might be able to show you consequences of selling where and when. I asked mine to show me forecasted tax forms if I did 6 different scenarios (sell all immediately, wait a year for LTCG, buy and hold and sell, DCA, etc)

If I understand correctly, you 83b-ed or purchased your stock earlier, and now own it outright. Is the stock QSBS? DO you have LTCG?

One of my advisors showed me that if I hold a certain lot in stock for long term capital gains, the stock can go down no more than 6% before the short term (12 month) benefit is moot due to AMT costs.

I personally found the best path to determine how much I need/want/decide to have immediately... Pay off debt except house, fund kid's college, put enough money in retirement (taxable) that we no longer have to work/worry about money. For us this is about $3M.

The rest we are analyzing how to optimize it for the long term, how much if not all to diversify, and how much to let ride.

You may consider assembling a team to help guide you. An RIA is not a bad idea, my philosophy is that right now I need training wheels. Paying an RIA 0.5%/year AUM (only on non-tax qualified and diversified wealth, 0% on concentrated wealth) is a small tax to have an advisor who has been there and done that.

I recommend you obtain the following team:

1. CPA who can file taxes with semicomplex stock transactions, help you pay quarterly taxes/set withholdings, etc..
2. Tax Strategist (also probably a CPA, but this is the creative person, I want the person filing the taxes to be the checks-and-balance to the strategist, so we are doing things that are legal and kosher)
3. Investment Advisor - most bogleheads will say you don't need this, just invest in 3-fund, and they might be right. I want someone to help me think about other asset classes for speculation. These folks often know the basic "tricks" to do things right, and they come w/ benefits like have 2.5% margin rates (if you want to buy a house collateralized with stock, for example), and know about tools and opportunities that may make sense. Make damned sure they are truly fiduciary and look at their SEC ADV Forms to make sure you know who/what they are. In my case, a friend of 20 years recommended my RIA so my perceived risk is low.
4. Estate Planning Attorney - I have so much more peace of mind knowing that my family has a revocable trust, healtchare POA, Finance POA, and will to specify what happens to kids, and irrevocable trusts set up for kids if we die
5. Insurance Agent - make sure you have good somewhat high coverage for house, car, etc and an umbrella or Excessive Liability Insurance

Now, some unsolicited advice:

1. Get rid of Schwab and move to Vanguard or Fidelity. Schwab isn't terrible, but it's not great.
2. Get the F out of California. State is going downhill fast. I don't think a person should live there unless they have >$10M post-tax wealth. It's been relatively easy for me to find a job working remotely w/ my skill set.
3. Ping me or others for input. We have a slack channel for "new money" people going through these decisions, ping me if you want to join

NewMoneyMustBeSmart
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Re: How to handle 5M capital gain (post-IPO)

Post by NewMoneyMustBeSmart » Thu Oct 17, 2019 7:00 am

fluter wrote:
Wed Oct 16, 2019 10:05 pm
fujiters wrote:
Wed Oct 16, 2019 10:18 am
I just want to echo the recommendations to look into options as a way to hedge to avoid selling it all in one year. See:

https://www.investopedia.com/articles/s ... sition.asp
Thanks for the suggestion (and link, I hadn't found that page). I will consider a couple (simpler) options strategies. But I met with a CPA and the total tax is basically the same if I sell in one year or spread over multiple years (at least for the 2-3 yr time horizon). I'm thinking of holding some until January 2020 so that I have more chance of harvesting some losses in the new year to offset the gain. So maybe an options strategy on a shorter time scale would make sense.
My understanding wrt options v. tax v. risk:

1. The options invalidate LTCG status if the derivative is not at least 10% away (greater or less) from FMV at implementation.
2. How much tax you pay is not a worry you should look at. Capital preservation/optimization is your focus here. Don't let the tail wag the dog. You certainly could build a laddered put structure on the unsold stock.
3. If I could pay 10% of my stock now to lock in the price (put option) I'd do it in a heartbeat.

NewMoneyMustBeSmart
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Re: How to handle 5M capital gain (post-IPO)

Post by NewMoneyMustBeSmart » Thu Oct 17, 2019 7:02 am

I was told by someone that there are really two sets of rules that govern what you can do with your stock. Recommend you check with an attorney to make sure:

1. SEC Rules - prevent insider trading and deal with Material Non-Public Information
2. Company Rules - usually things like can't short, can't do derivatives, have to obey blackout periods etc

I was told that while the consequences for breaking #1 can involve jail and fines, in general the consequences for disobeying your employer can only lead (worst/likely case) to termination and associated consequences.

Some people I have spoken with have so much post-vest wealth at steak they don't worry so much about the consequences of breaking #2.
Valuethinker wrote:
Thu Oct 17, 2019 2:43 am
fluter wrote:
Wed Oct 16, 2019 10:05 pm
fujiters wrote:
Wed Oct 16, 2019 10:18 am
I just want to echo the recommendations to look into options as a way to hedge to avoid selling it all in one year. See:

https://www.investopedia.com/articles/s ... sition.asp
Thanks for the suggestion (and link, I hadn't found that page). I will consider a couple (simpler) options strategies. But I met with a CPA and the total tax is basically the same if I sell in one year or spread over multiple years (at least for the 2-3 yr time horizon). I'm thinking of holding some until January 2020 so that I have more chance of harvesting some losses in the new year to offset the gain. So maybe an options strategy on a shorter time scale would make sense.
The only options strategy that i know of that I think would work is to buy Puts on your own company stock:

- beware of insider trading rules - you probably need permission from your employer
- I don't believe there are put options available on most individual companies
- of course it is insurance and you win, with insurance, if it never pays off i.e. you lose money

I may be missing something, but that's my general understanding.

NewMoneyMustBeSmart
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Re: How to handle 5M capital gain (post-IPO)

Post by NewMoneyMustBeSmart » Thu Oct 17, 2019 7:04 am

Valuethinker wrote:
Thu Oct 17, 2019 6:02 am
If you die with too much money, you basically lost the game - you spent more time on your money than was actually justified.
Damn good point. Dying with more money that you need to pass on to your heirs/charities is like over-withholding.

Unfortunately, some of us have the puritanical cultural mindset that build a big pile of gold is good for its own purpose. But your recommendation is something people should always keep in mind.

Similarly, few have been on their deathbed and said "I wish I'd spent more time at work, I did too much fun stuff, and have spent too much time with family and friends and improving the world"

HomeStretch
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Re: How to handle 5M capital gain (post-IPO)

Post by HomeStretch » Thu Oct 17, 2019 7:08 am

NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 6:56 am
If I understand correctly, you 83b-ed or purchased your stock earlier, and now own it outright.
I don’t believe OP made an 83-b election for the shares held as OP is talking about owing federal taxes on the gain and not just state taxes.

NewMoneyMustBeSmart
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Re: How to handle 5M capital gain (post-IPO)

Post by NewMoneyMustBeSmart » Thu Oct 17, 2019 7:17 am

HomeStretch wrote:
Thu Oct 17, 2019 7:08 am
NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 6:56 am
If I understand correctly, you 83b-ed or purchased your stock earlier, and now own it outright.
I don’t believe OP made an 83-b election for the shares held as OP is talking about owing federal taxes on the gain and not just state taxes.
Not sure I agree but you're probably right. When I am given options with strike of X and I exercise at Y, I pay tax on the difference between Y and X at exercise.

83b is "early exercise" which effectively converts options into restricted stock.

Later when you sell the stock at Z on purchased 83b options after they vest/restriction is removed, you pay tax on the difference between Y and Z.

However, you're probably right. OP is probably meaning Restricted Stock Units - which are similar to $0 cost options with different terms and tax consequences.

In my pedantic view of the world, RS and RSU are different, but in practice you are probably right.

HomeStretch
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Re: How to handle 5M capital gain (post-IPO)

Post by HomeStretch » Thu Oct 17, 2019 7:33 am

NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 7:17 am
HomeStretch wrote:
Thu Oct 17, 2019 7:08 am
NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 6:56 am
If I understand correctly, you 83b-ed or purchased your stock earlier, and now own it outright.
I don’t believe OP made an 83-b election for the shares held as OP is talking about owing federal taxes on the gain and not just state taxes.
Not sure I agree but you're probably right. When I am given options with strike of X and I exercise at Y, I pay tax on the difference between Y and X at exercise.

83b is "early exercise" which effectively converts options into restricted stock.
I understand your point now. I haven’t seen the process of early exercising options into restricted stock referred to as “83b”.

An 83(b) election is an election made with the IRS to be taxed on the market value of restricted stock at date of grant rather than date of vesting. Very useful in early start-ups as the R/S Market valuations I have seen/paid tax on have been very low.

Valuethinker
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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Thu Oct 17, 2019 8:02 am

NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 7:04 am
Valuethinker wrote:
Thu Oct 17, 2019 6:02 am
If you die with too much money, you basically lost the game - you spent more time on your money than was actually justified.
Damn good point. Dying with more money that you need to pass on to your heirs/charities is like over-withholding.

Unfortunately, some of us have the puritanical cultural mindset that build a big pile of gold is good for its own purpose. But your recommendation is something people should always keep in mind.

Similarly, few have been on their deathbed and said "I wish I'd spent more time at work, I did too much fun stuff, and have spent too much time with family and friends and improving the world"
Many of the truly worthwhile jobs don't pay well - not enough to support a middle class life for a family (although that latter is elastic). Most of us make a compromise between "dream job" changing the world in some way, and real life work. You work for an ad agency, and its clients include big tobacco - that's a tricky one.

You can be a doctor, and become one to help people in need. But be drowned in the financial realities - student loans, billing, insurance, hospital and practice politics, etc. Similarly you can be institutionalized by a police force culture, or a fire department culture, or by struggles between union & employers, and lose sight of what drew you to that work. I know of some pretty horrible not-for-profits in terms of how they treat their staff.

I knew someone once who knew, through a community connection, a famous American politician (not the current President) who told him "I am doing this for my family". Which led my contact to wonder if aforesaid person really knew what his family wanted or needed.

You have to strike a balance.

If you luck out and make a pile of money on an event risk, like an IPO, you have to treat it as money from God, or Fate - so the moral question then becomes how best you pay that forward. How a future you, on its deathbed, will think you lived life well.

Cameron Russell's TED Talk about "winning the genetic lottery" is one of the most popular TED talks out there. She is a successful model, her parents are tech entrepreneurs, but she has chosen to become engaged. But it's worth a watch, because she has what most of us don't have (by definition) - above average beauty, and it is her reflection on what that means*. In much the same way as having been gifted by fate or chance with a large lump sum of money.

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Re: How to handle 5M capital gain (post-IPO)

Post by MotoTrojan » Thu Oct 17, 2019 10:48 am

NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 6:56 am



REGRET MINMIZATION

Many of the RIAs I've spoken with who have managed money for years (>10 y) say that a lot of tech folks have regretted selling everything to watch the stock go up 200% in 1-3 years. So, if you follow this school of thought, perhaps keep some long term.

The human mind is fascinating, isn't it. We regret not staying in a stock that goes up 200% because we had it for a moment, but we do not regret not buying BTC at $0.008.

Same thing with those that receive RSUs in a public company. There is no difference between getting an RSU, and getting a cash bonus then immediately buying the company stock, yet the reaction to each is vastly different for many people (they keep the RSUs even if they wouldn't have bought the stock).

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fluter
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Re: How to handle 5M capital gain (post-IPO)

Post by fluter » Thu Oct 17, 2019 11:55 am

NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 6:56 am
If I understand correctly, you 83b-ed or purchased your stock earlier, and now own it outright.
To clarify, I purchased restricted stock shares in 2008 (not RSU's, I purchased the shares outright). All the gain is long term, with a nearly zero cost basis. Now that the stock is publicly traded, the restrictions have lifted (checked with a lawyer to confirm that). I haven't been involved in the company for years, so there are no trading restrictions due to company policy, and I don't have any insider information.

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Re: How to handle 5M capital gain (post-IPO)

Post by coffeeblack » Thu Oct 17, 2019 12:18 pm

Congrats on the windfall.

This is what I would do.

1. Sell the individual stocks.
2. Pay the taxes.
3. Invest in a 3 fund or 4 fund portfolio.
4. Use some of it to take a nice vacation.

Taxes will be high but so what. After taxes for the entire 4.8 mil you will have around 3.5 or so. Add that to 1 million that you already have and thats 4.5 mil at 36 years old. Let it grow for a few years and it will be a very nice retirement. Early nor not.

The individual company stocks may not stay high very long. Many IPO's don't make it.

If you ever lose your job or need a break you have the money to take off and not worry about it. You can also use some of the money to reinvest into another company at it's starting stage and still have the security from keeping most of it in basic low fee funds.

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Wiggums
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Re: How to handle 5M capital gain (post-IPO)

Post by Wiggums » Thu Oct 17, 2019 12:43 pm

Congratulations on your windfall.

My father always told me: better to make a ton of money and pay the taxes, then to be poor.

I’d personally sell the company stock. I’ll leave the timing up to you.

I had a friend who put down $9,000 and watched his account grow to 1.8 million. He wanted to sell, but didn’t Know what to do with the money, so he did nothing.

Had a coworker who worked in the phone industry for almost 40 years. He held onto the company stock and it went down to 98 cents.

Both were profitable companies that fell out of favor.

Good luck to you.

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Re: How to handle 5M capital gain (post-IPO)

Post by NewMoneyMustBeSmart » Thu Oct 17, 2019 12:54 pm

fluter wrote:
Thu Oct 17, 2019 11:55 am
NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 6:56 am
If I understand correctly, you 83b-ed or purchased your stock earlier, and now own it outright.
To clarify, I purchased restricted stock shares in 2008 (not RSU's, I purchased the shares outright). All the gain is long term, with a nearly zero cost basis. Now that the stock is publicly traded, the restrictions have lifted (checked with a lawyer to confirm that). I haven't been involved in the company for years, so there are no trading restrictions due to company policy, and I don't have any insider information.
Thanks for clarifying. I call that "Stock." The restrictions are lifted, so now it's just shares of stock :-)

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Re: How to handle 5M capital gain (post-IPO)

Post by NewMoneyMustBeSmart » Thu Oct 17, 2019 12:59 pm

MotoTrojan wrote:
Thu Oct 17, 2019 10:48 am
NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 6:56 am
REGRET MINMIZATION

Many of the RIAs I've spoken with who have managed money for years (>10 y) say that a lot of tech folks have regretted selling everything to watch the stock go up 200% in 1-3 years. So, if you follow this school of thought, perhaps keep some long term.

The human mind is fascinating, isn't it. We regret not staying in a stock that goes up 200% because we had it for a moment, but we do not regret not buying BTC at $0.008.

Same thing with those that receive RSUs in a public company. There is no difference between getting an RSU, and getting a cash bonus then immediately buying the company stock, yet the reaction to each is vastly different for many people (they keep the RSUs even if they wouldn't have bought the stock).
You are, of course, correct.

In the regret minimization approach for post-ipo stock windfalls, the approach I've heard as a general rule, subject to much analysis is repeated as explained by others as:

1. Sell at least 1/3 immediately - that way if the remaining stock falls to 0 - your regret of getting nothing is moot as you've sold 1/3. The actual amount may vary from 1/3 if you need to sell X to hit your number, FIRE or whatever you call it.

2. Keep 1/3 for more than a year - that way if it goes up a lot you benefit from that and don't regret selling "low." If it goes to 0 - you've already sold 1/3rd. If it goes up you capture benefit. [note this generally doesn't help with tax planning, or spreading sales out over years to lower your marginal tax rate as 1/Nth of the windfall per year will still put you in highest marginal rate even if you spread the sales out over years].

3. The middle 1/3 is up to you. Well, it's all up to you.

It turns out some people are genetically wired to gamble, and regret not making money they COULD have made more than money they lose.

Most people regret loss more than missed opportunity and will tend towards diversifying more/all early.

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Re: How to handle 5M capital gain (post-IPO)

Post by MotoTrojan » Thu Oct 17, 2019 1:34 pm

NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 12:59 pm
MotoTrojan wrote:
Thu Oct 17, 2019 10:48 am
NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 6:56 am
REGRET MINMIZATION

Many of the RIAs I've spoken with who have managed money for years (>10 y) say that a lot of tech folks have regretted selling everything to watch the stock go up 200% in 1-3 years. So, if you follow this school of thought, perhaps keep some long term.

The human mind is fascinating, isn't it. We regret not staying in a stock that goes up 200% because we had it for a moment, but we do not regret not buying BTC at $0.008.

Same thing with those that receive RSUs in a public company. There is no difference between getting an RSU, and getting a cash bonus then immediately buying the company stock, yet the reaction to each is vastly different for many people (they keep the RSUs even if they wouldn't have bought the stock).
You are, of course, correct.

In the regret minimization approach for post-ipo stock windfalls, the approach I've heard as a general rule, subject to much analysis is repeated as explained by others as:

1. Sell at least 1/3 immediately - that way if the remaining stock falls to 0 - your regret of getting nothing is moot as you've sold 1/3. The actual amount may vary from 1/3 if you need to sell X to hit your number, FIRE or whatever you call it.

2. Keep 1/3 for more than a year - that way if it goes up a lot you benefit from that and don't regret selling "low." If it goes to 0 - you've already sold 1/3rd. If it goes up you capture benefit. [note this generally doesn't help with tax planning, or spreading sales out over years to lower your marginal tax rate as 1/Nth of the windfall per year will still put you in highest marginal rate even if you spread the sales out over years].

3. The middle 1/3 is up to you. Well, it's all up to you.

It turns out some people are genetically wired to gamble, and regret not making money they COULD have made more than money they lose.

Most people regret loss more than missed opportunity and will tend towards diversifying more/all early.
Hard to say what you'd do until you are in the actual situation but I could see it being a horseshoe curve for me.

If it is worth 1/2 of the amount I need for FIRE I could see myself wanting to sell ~1/2 and let the rest ride a bit in hopes of achieving FIRE with it. If it is close to or just over FIRE, I would cash out, and know that I am now independent. If it was vastly over FIRE I'd sell FIRE + margin, and gamble the rest for my private jet.

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Re: How to handle 5M capital gain (post-IPO)

Post by AerialWombat » Thu Oct 17, 2019 1:57 pm

MotoTrojan wrote:
Thu Oct 17, 2019 1:34 pm
Hard to say what you'd do until you are in the actual situation but I could see it being a horseshoe curve for me.

If it is worth 1/2 of the amount I need for FIRE I could see myself wanting to sell ~1/2 and let the rest ride a bit in hopes of achieving FIRE with it. If it is close to or just over FIRE, I would cash out, and know that I am now independent. If it was vastly over FIRE I'd sell FIRE + margin, and gamble the rest for my private jet.
Excellent way of looking at it.

I've thought this through thoroughly for my own situation, and know exactly what I'll do if the tech startup I co-founded has an exit. If all or part of the acquisition results in me acquiring shares of a publicly traded company, those shares will be sold, in full, a millisecond after I'm legally allowed to do so.

And unlike the OP, once I hit my magic number, I'm dropping off the face the Earth and vanishing into the ether. I ain't stickin' 'round fer nuthin'.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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Re: How to handle 5M capital gain (post-IPO)

Post by NewMoneyMustBeSmart » Thu Oct 17, 2019 3:10 pm

AerialWombat wrote:
Thu Oct 17, 2019 1:57 pm
And unlike the OP, once I hit my magic number, I'm dropping off the face the Earth and vanishing into the ether. I ain't stickin' 'round fer nuthin'.
10 years ago I hired a wealthy friend who wanted to help me with an interesting problem.

Someone told him, "If I had your money, I'd be on a beach somewhere."

My friend responded, "That's why you still have to work and will until you die."

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Re: How to handle 5M capital gain (post-IPO)

Post by AerialWombat » Thu Oct 17, 2019 3:42 pm

NewMoneyMustBeSmart wrote:
Thu Oct 17, 2019 3:10 pm
AerialWombat wrote:
Thu Oct 17, 2019 1:57 pm
And unlike the OP, once I hit my magic number, I'm dropping off the face the Earth and vanishing into the ether. I ain't stickin' 'round fer nuthin'.
10 years ago I hired a wealthy friend who wanted to help me with an interesting problem.

Someone told him, "If I had your money, I'd be on a beach somewhere."

My friend responded, "That's why you still have to work and will until you die."
I hear some variation of this saying quite frequently, and I completely disagree with it. I'm an incredibly lazy person by nature, but I know what needs to get done when things need to get done. I've built my companies through "sprints" -- short (3-6 month) bursts of extreme high productivity (80+ hour weeks). During coasting periods, I wholeheartedly embrace "The 4-Hour Workweek".

I'm done with any more boost/sprint phases, and am now in permanent coast mode. I enter semi-retirement on Dec. 21, and very much look forward to being on many beaches.

Financial success and wanting to work as little as possible are not mutually exclusive.
“Life doesn’t come with a warranty.” -Michael LeBoeuf

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Re: How to handle 5M capital gain (post-IPO)

Post by EnjoyIt » Thu Oct 17, 2019 3:49 pm

AerialWombat wrote:
Thu Oct 17, 2019 3:42 pm
....
I hear some variation of this saying quite frequently, and I completely disagree with it. I'm an incredibly lazy person by nature, but I know what needs to get done when things need to get done. I've built my companies through "sprints" -- short (3-6 month) bursts of extreme high productuvity (80+ hour weeks). During coasting periods, I wholeheartedly embrace "The 4-Hour Workweek".

I'm done with any more boost/sprint phases, and am now in permanent coast mode. I enter semi-retirement on Dec. 21, and very much look forward to being on many beaches.

Financial success and wanting to work as little as possible are not mutually exclusive.
:sharebeer
Busting your rump to reach a financial goal and then taking life a little bit easier is a fantastic goal. Congrats, and good luck on Dec 21st.

I too am a lazy person by nature as well but have worked very hard when needed to reach our current wealth and get to our goals.

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Re: How to handle 5M capital gain (post-IPO)

Post by fluter » Fri Oct 18, 2019 10:26 am

toast0 wrote:
Wed Oct 16, 2019 12:11 am
Is there a chance that some of this stock was purchased when the company was a qualified small business?
Thanks for the suggestion, I wasn't aware of that exclusion. Unfortunately, looks like it doesn't help in this case. Darn!

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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Fri Oct 18, 2019 4:18 pm

fluter wrote:
Fri Oct 18, 2019 10:26 am
toast0 wrote:
Wed Oct 16, 2019 12:11 am
Is there a chance that some of this stock was purchased when the company was a qualified small business?
Thanks for the suggestion, I wasn't aware of that exclusion. Unfortunately, looks like it doesn't help in this case. Darn!
You now have to wait until Monday to realise any stock value.

A simple Twitter tweet could in that time lead to a military confrontation that causes markets to plunge.

A major financial institution could go bankrupt over the weekend.

A major tech company could announce bad news post closing, leading to a tech sector plunge.

I reccomend not waiting for the best tax advice but taking some money off the table.

Time is not your friend in this.

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fluter
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Re: How to handle 5M capital gain (post-IPO)

Post by fluter » Mon Oct 21, 2019 9:27 am

I reccomend not waiting for the best tax advice but taking some money off the table.

Time is not your friend in this.
Looks like we made it through the weekend without a major collapse, but I appreciate your point. I've already sold 1.5M (~1M after tax). So even in the worst case I'll come out of this in better shape than I went in. For the remaining 3.3 M, I'm trying to balance getting advice with not waiting too long to act.

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Re: How to handle 5M capital gain (post-IPO)

Post by Valuethinker » Mon Oct 21, 2019 10:50 am

fluter wrote:
Mon Oct 21, 2019 9:27 am
I reccomend not waiting for the best tax advice but taking some money off the table.

Time is not your friend in this.
Looks like we made it through the weekend without a major collapse, but I appreciate your point. I've already sold 1.5M (~1M after tax). So even in the worst case I'll come out of this in better shape than I went in. For the remaining 3.3 M, I'm trying to balance getting advice with not waiting too long to act.
I've had friends who worked for quoted Silicon Vallet tech stocks like Oracle Amazon Ebay.

The Street absolutely pounds a stock that misses its quarterly numbers. Stock can drop 25 per cent.

They are called "torpedo stocks". High PE and high EPS growth forecast.

When you blow your EPS forecasts come down. That is one drop on the stock. But then the stock rating ie price to EPS ratio also drops.

So its double whammy. Sentiment can turn on a dime for these things.

Pre IPO things like quarterly numbers don't matter. It's all about growing and investing in the business.

Quoted markets are not so long term. They live a stock and then they swipe left and love someone else.

A lot of wealth can be destroyed in a relatively short time.

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Re: How to handle 5M capital gain (post-IPO)

Post by shess » Mon Oct 21, 2019 11:52 am

fluter wrote:
Mon Oct 21, 2019 9:27 am
I reccomend not waiting for the best tax advice but taking some money off the table.

Time is not your friend in this.
Looks like we made it through the weekend without a major collapse, but I appreciate your point. I've already sold 1.5M (~1M after tax). So even in the worst case I'll come out of this in better shape than I went in. For the remaining 3.3 M, I'm trying to balance getting advice with not waiting too long to act.
Hey, I'll tack against the wind on people's points about how suddenly it can all go away. Yes, a random thing can happen, and you can unwind 90% of your position in like a week. But for the rest of that year the stock maybe was up or sideways or random. I think it's reasonable to do some MODEST wait and see.

The point I would start second-guessing yourself is when you find yourself thinking things like "If I hold it just a little bit longer, I'll make Nx vs the market". Bulls and bears make money, pigs get slaughtered - greed blinds you to obvious signals.

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Re: How to handle 5M capital gain (post-IPO)

Post by TomatoTomahto » Mon Oct 21, 2019 12:08 pm

I hate baseball, but the analogy works better than the hockey one of “you’re up 2-0, one minute to go, why on earth would you pull your goalie?”

You hit a legit triple, don’t get thrown out trying to steal home.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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Re: How to handle 5M capital gain (post-IPO)

Post by aristotelian » Mon Oct 21, 2019 12:45 pm

TomatoTomahto wrote:
Mon Oct 21, 2019 12:08 pm
I hate baseball, but the analogy works better than the hockey one of “you’re up 2-0, one minute to go, why on earth would you pull your goalie?”

You hit a legit triple, don’t get thrown out trying to steal home.
This would be more like hitting a home run and then failing to touch the plate!

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Re: How to handle 5M capital gain (post-IPO)

Post by EnjoyIt » Mon Oct 21, 2019 12:53 pm

There was a comment above regarding setting up a collar on the stock.
https://www.investopedia.com/terms/c/collar.asp

Why is that option being ignored? It may be the right solution to minimize taxes and protect against losses.

In all honesty I am not an expert by any means regarding this strategy, but it looks viable and maybe worth a discussion.

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Re: How to handle 5M capital gain (post-IPO)

Post by TN_Boy » Mon Oct 21, 2019 1:22 pm

RadAudit wrote:
Wed Oct 16, 2019 3:44 pm
ScaledWheel wrote:
Wed Oct 16, 2019 10:13 am
Depending on how long you've been gone, you know more about your former company's competitive advantage and position in the market than us. If it has had a good post-IPO trajectory, I would be inclined to "dollar cost average" out of your holdings in the next couple years, maybe holding a very small amount relative to your initial holdings at the end.

Congratulations on your hard work and good fortune!
Of course, congrats.

Not to start a cat fight, but, I would be careful about assuming what I knew about your company's competitive advantage. I'm not so sure the market cares about the competitive advantage as you see it at any point in time and may take a differing view for a very long time.
The OP knows more about the former company's competitive advantage than we do, but that doesn't mean the OP knows what the stock is going to do. In particular, the OP almost certainly does not know what surprises competitors might unveil. The company might or might not outperform the market in the future.

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Re: How to handle 5M capital gain (post-IPO)

Post by TN_Boy » Mon Oct 21, 2019 1:29 pm

Valuethinker wrote:
Mon Oct 21, 2019 10:50 am
fluter wrote:
Mon Oct 21, 2019 9:27 am
I reccomend not waiting for the best tax advice but taking some money off the table.

Time is not your friend in this.
Looks like we made it through the weekend without a major collapse, but I appreciate your point. I've already sold 1.5M (~1M after tax). So even in the worst case I'll come out of this in better shape than I went in. For the remaining 3.3 M, I'm trying to balance getting advice with not waiting too long to act.
I've had friends who worked for quoted Silicon Vallet tech stocks like Oracle Amazon Ebay.

The Street absolutely pounds a stock that misses its quarterly numbers. Stock can drop 25 per cent.

They are called "torpedo stocks". High PE and high EPS growth forecast.

When you blow your EPS forecasts come down. That is one drop on the stock. But then the stock rating ie price to EPS ratio also drops.

So its double whammy. Sentiment can turn on a dime for these things.

Pre IPO things like quarterly numbers don't matter. It's all about growing and investing in the business.

Quoted markets are not so long term. They live a stock and then they swipe left and love someone else.

A lot of wealth can be destroyed in a relatively short time.
Yeah, I've worked for a silicon valley growth story company. Can be very volatile. Never had the kind of money the OP did at stake. But even with standard stock options and such, it was interesting to see how much my *potential* net-worth could fluctuate.

Also, I started work for that company in the late 90s. I knew people who started a bit before me that were millionaires on paper per granted, but not vested, stock options. But then 2000 happened, and the stock options vest 25% per year and ...... those folks never became millionaires. Importantly, the company actually rode out the tech crash pretty well (for a tech company) and then continued to grow through the 2000s. But the crash took down tech stock valuations enough to kill some stock option dreams.

There is a lot to be said for taking the money and running.

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Re: How to handle 5M capital gain (post-IPO)

Post by MotoTrojan » Mon Oct 21, 2019 1:34 pm

TN_Boy wrote:
Mon Oct 21, 2019 1:22 pm
RadAudit wrote:
Wed Oct 16, 2019 3:44 pm
ScaledWheel wrote:
Wed Oct 16, 2019 10:13 am
Depending on how long you've been gone, you know more about your former company's competitive advantage and position in the market than us. If it has had a good post-IPO trajectory, I would be inclined to "dollar cost average" out of your holdings in the next couple years, maybe holding a very small amount relative to your initial holdings at the end.

Congratulations on your hard work and good fortune!
Of course, congrats.

Not to start a cat fight, but, I would be careful about assuming what I knew about your company's competitive advantage. I'm not so sure the market cares about the competitive advantage as you see it at any point in time and may take a differing view for a very long time.
The OP knows more about the former company's competitive advantage than we do, but that doesn't mean the OP knows what the stock is going to do. In particular, the OP almost certainly does not know what surprises competitors might unveil. The company might or might not outperform the market in the future.
It would be fascinating to see a scientific study on how well insiders vs. outsiders did at predicting the future success of a business. I would imagine there is some pretty significant internal bias that would actually make them worse of.

I'd liken this to the anchoring bias seen in studies done by Freakonomics and similar. Most fascinating one to me was when they showed realtors homes and told them the asking price, then asked them what they thought a fair price would be. There was a huge anchor to the price shown, rather than a truly blind/independent analysis.

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Re: How to handle 5M capital gain (post-IPO)

Post by TN_Boy » Mon Oct 21, 2019 1:39 pm

fluter wrote:
Tue Oct 15, 2019 11:26 pm
A company that I worked for when it was a very early stage startup had an IPO earlier this year. I've been holding restricted stock that is now liquid, and worth ~4.8M. After the IPO lock-out expired, I sold 30% to lock in some gain (and help myself sleep at night), and I'm trying to decide what to do with the rest (~3.3M left in stock). I want to diversify the concentrated position into index funds. The gain is long term, but I live in CA, so state taxes are steep. (Moving to a lower tax state is not a possibility for the next few years.)

I'm 36, married with one kid. My portfolio outside this position is ~1M, in a mix of index funds (Schwab) and short/mid term bonds. I don't have any debts, and don't own real estate.

I'd appreciate any thoughts on how you would approach this situation (maybe "problem" isn't the right word). Would you just sell over time and pay the tax? I have spoken with a couple advisors (fee-only, 1% AUM), who have recommended more exotic strategies such as exchange funds, opportunity zone funds, and covered calls. Up until now I have been a DIY investor following the BH philosophy (and have been happy with that). I'm trying to weigh the pros and cons of just selling and paying the tax versus paying an advisor to help minimize the tax.

Thanks,
Parker

Edit:
I have read the Wiki page on Managing a Windfall.
I would sell and pay the taxes, painful thought that might be. I would consult with a tax specialist. Tomorrow. I might hold on to 10% or so of the stock. If it takes off, then you are still making some money off that it. If it doesn't, even if it tanks, you are not much worse off.

Given the size of the windfall, my 1), 2) and 3) goals would be to take the risk of those gains evaporating off the table as fast as possible. Other goals are far less important.

Consider how well set you are for early retirement with a portfolio in the millions at age 36. Properly handled, that stock solves your financial problems. Sure, if you sell it all and it doubles again and again, you'll be sorry. But, you will still be at least somewhat rich.

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Re: How to handle 5M capital gain (post-IPO)

Post by fluter » Mon Oct 21, 2019 2:01 pm

EnjoyIt wrote:
Mon Oct 21, 2019 12:53 pm
There was a comment above regarding setting up a collar on the stock.

Why is that option being ignored?
The function of the collar (as I understand it) is to trade future upside to hedge against downside (so both potential gains and losses are limited), and then unwind the position over time so that you realize lower capital gains in a single year. In this case, the position is large enough that even if I unwound over five years, I'd still be hitting the top tax bracket in each year. Five years is a long time for a fresh IPO. Who knows, maybe the company goes bankrupt during that time? Seems to me that a collar would stretch the tax out over a few years, but not lower the total bill. But of course happy to hear other opinions.

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Re: How to handle 5M capital gain (post-IPO)

Post by TN_Boy » Mon Oct 21, 2019 2:01 pm

MotoTrojan wrote:
Mon Oct 21, 2019 1:34 pm
TN_Boy wrote:
Mon Oct 21, 2019 1:22 pm
RadAudit wrote:
Wed Oct 16, 2019 3:44 pm
ScaledWheel wrote:
Wed Oct 16, 2019 10:13 am
Depending on how long you've been gone, you know more about your former company's competitive advantage and position in the market than us. If it has had a good post-IPO trajectory, I would be inclined to "dollar cost average" out of your holdings in the next couple years, maybe holding a very small amount relative to your initial holdings at the end.

Congratulations on your hard work and good fortune!
Of course, congrats.

Not to start a cat fight, but, I would be careful about assuming what I knew about your company's competitive advantage. I'm not so sure the market cares about the competitive advantage as you see it at any point in time and may take a differing view for a very long time.
The OP knows more about the former company's competitive advantage than we do, but that doesn't mean the OP knows what the stock is going to do. In particular, the OP almost certainly does not know what surprises competitors might unveil. The company might or might not outperform the market in the future.
It would be fascinating to see a scientific study on how well insiders vs. outsiders did at predicting the future success of a business. I would imagine there is some pretty significant internal bias that would actually make them worse of.

I'd liken this to the anchoring bias seen in studies done by Freakonomics and similar. Most fascinating one to me was when they showed realtors homes and told them the asking price, then asked them what they thought a fair price would be. There was a huge anchor to the price shown, rather than a truly blind/independent analysis.
That would be an interesting study. Unless you are a pretty senior person at a company, with a lot of industry experience, including some at other companies, your take on how well your company will succeed is probably not very good. (And even if you are that senior person, you still don't know what the other guy is about to do).

It especially cracks me up when a relatively junior person thinks their company cannot fail. Enthusiasm very good. Wild-eyed optimism not so much.

And, even if your company does succeed reasonably well, the stock return, especially if starting from a high valuation, might not exceed that of safer investments.

The other thing about a lot of the high-flying tech stocks at least, is that they are very high-beta. When the market goes up a lot, they go up a lot more. Likewise on the downside. So if you have big money in a high-flyer and the market crashes, you will probably (I did say probably) see a much bigger hit than the guy holding a total market fund. No worries you say, when the market comes back, the stock will go up more. But now you have to hold that single stock a longer time to see that gain, which exposes you to single stock risk for a potentially long time. Holding on to a high-flyer is a way to get rich if it pans out, but well, most of the those high-flyers don't make everybody rich.

But we should all agree, the OP has a very good problem to solve.

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Re: How to handle 5M capital gain (post-IPO)

Post by EnjoyIt » Mon Oct 21, 2019 2:13 pm

fluter wrote:
Mon Oct 21, 2019 2:01 pm
EnjoyIt wrote:
Mon Oct 21, 2019 12:53 pm
There was a comment above regarding setting up a collar on the stock.

Why is that option being ignored?
The function of the collar (as I understand it) is to trade future upside to hedge against downside (so both potential gains and losses are limited), and then unwind the position over time so that you realize lower capital gains in a single year. In this case, the position is large enough that even if I unwound over five years, I'd still be hitting the top tax bracket in each year. Five years is a long time for a fresh IPO. Who knows, maybe the company goes bankrupt during that time? Seems to me that a collar would stretch the tax out over a few years, but not lower the total bill. But of course happy to hear other opinions.
That depends on a few things. What tax bracket are you in without the sale of this stock? If you are already in the top fed tax bracket 23.8% and the top state tax bracket 12.3%. It also matters if you are planning to love out of state in 3 years. Also, it may allow you to tax loss harvest other losses over those years as well cutting your tax exposer further.

I will admit this is only worthwhile if you are or will be in a lower tax bracket in the future. Otherwise yeah, your best bet is to just sell it all now maybe keeping a little bit as a gamble on the future if you have lots of confidence in the company.

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Re: How to handle 5M capital gain (post-IPO)

Post by TomatoTomahto » Mon Oct 21, 2019 3:15 pm

TN_Boy wrote:
Mon Oct 21, 2019 2:01 pm
Unless you are a pretty senior person at a company, with a lot of industry experience, including some at other companies, your take on how well your company will succeed is probably not very good.
I worked for a CIO who had been a CIO at his previous firm, a well-known financial services company. He was “all in” the company stock, which plummeted to essentially zero. He had been set for life, but got greedy.

CIO is senior, and he had loads of experience, but not as in-the-know as the CFO.

I have let the experience of working with a regret-filled CIO inform my decisions about company stock.
Okay, I get it; I won't be political or controversial. The Earth is flat.

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