By |Published On: Apr 22, 2024|Categories: Financial Planning, ISOs|

When you have ISOs at a publicly traded company (post IPO ISOs), there are many factors to consider. These include:

  1. The amount of time your company has been in the public realm
  2. Restrictions as an employee who owns shares in your company
  3. Your comfort level associated with owning company shares
  4. Other forms of equity compensation and how they influence your decisions
  5. Tax, cash flow, and financial position considerations

Post IPO ISOs – Recent IPO

Your company recently completed its IPO! Congratulations! You also have a lot to think about. First, you have to abide by the laws of the lockup period. It is a timeframe as long as 7 months after the IPO when you cannot sell a single share.

Once you are past the lockup, you will be able to sell, as long as there isn’t a blackout period. All publicly traded companies have blackout periods and it’s the time around earnings announcements when you cannot buy or sell any shares.

Sometimes, you may have to get pre-clearance for buying and selling from the necessary department outside of the blackout periods. This all depends on your position in the company.

Furthermore, you may also be part of a 10b5-1 plan, where your trading of shares is pre-planned well in advance so you can avoid any sort of eyebrow raising activity.

ISO Qualification

Now, in order to qualify for the long term capital gains treatment for ISOs, you must own the shares for at least two years – one year from grant to exercise and another year from exercise to sale.

Owning shares in a company over the course of a year is a long time in the public markets. Anything can happen to the stock price. It can zoom up, it may crash, or perhaps it stays roughly the same. There’s no way to tell.

This table shows how different share prices impact the net proceeds of stock sales. In this example, $500,000 of income is estimated every year, for a total income of $1,000,000 over the 2 year period.

ISO Sales
Share Price at Sale$16$26$36
Gain on Sale$150,000$250,000$350,000
Total Income$1,150,000$1,250,000$1,350,000
Total Tax$269,703$284,610$299,517
Net Proceeds$880,297$965,390$1,050,483

Risk and Coordination

When you own shares in your company, you are increasing your risk. It may not feel risky to you because you work at the business and understand what is going on.

Coordinating your ISO activity with your other forms of equity compensation – stock bonuses, Restricted Stock Units (RSUs), Stock Appreciation Rights (SARs), is also important from a risk perspective.

Furthermore, you may be subject to the Alternative Minimum Tax (AMT) with ISOs.

ISOs at a Long Time Public Company

The taxes and rules are the same for both recent IPOs and long-time public companies – both post IPO ISO situations.

You have all of the same restrictions as a recent IPO – except for the lockup period. The other restrictions still apply – blackout dates, pre-clearance, and a 10b5-1 plan, if applicable.

Tax Picture

The AMT could be a factor with ISOs. If it is, you pay the AMT in the year of option exercise. When you sell the shares in a qualifying disposition, you will get an AMT credit in that year. Typically, the amount of AMT you pay and the AMT credit you receive differ. Why? The tax code is complicated so please take this question up with your tax practitioner or CPA.

When you sell the shares, you will have to pay capital gains tax on the proceeds of the sale, ranging from 0% to 20%. These rates depend on your income.

Moreover, Net Income Investment Tax (NIIT) of 3.8% is applicable on the proceeds if you make more than $200,000 as a Single tax filer and more than $250,000 Married Filing Jointly.

There are a lot of tax deliberations – potential AMT, long term capital gains taxes, and the Net Income Investment Tax.

Wrapping it All Up

As you think through your ISOs, there are many thoughts to contemplate. How is your appetite for risk – owning more shares in your employer. How do your company shares fit in with your investment portfolio and overall financial situation?

Exercising options costs money, so they are a drain on your cash flow. Is it wise for you to be spending money to take on more ownership in your company?

Lastly, we have taxes. The tax picture with ISOs can be very confusing.

When you go through all of these considerations, how are you feeling about your post IPO ISOs?