How tax planning can help startup entrepreneurs and employees make more money in an exit:
In reviewing Pinterest’s S-1 IPO filing, I noticed something unusual: Ben Silberman, founder and CEO, had 31.2 million vested and unexercised stock options in his company. While those options on IPO day would be worth a fortune of roughly $750 million, they would also likely carry a tax bill $150 million higher than what it could have been.
As an increasing number of companies leverage equity to incentivize their employees, it is worth ensuring that entrepreneurs and employees who hold equity fully understand their choices and the potential consequences.Startup equity can take many forms, which are not all treated equally by the IRS. Knowing exactly what one holds is key in unlocking the full potential value.
Once the company is legally formed, employees generally receive their equity in the form of stock options. These options have an exercise price which the employee must pay in order to convert the options to stock.
If an employee exercises and the company fails , the loss of funds used to exercise can offset other investment gains.
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