Andy: If someone’s been holed up eating ramen noodles for the last nine years, and then suddenly on paper, they’re worth a lot of money, we’d like to acknowledge that. You’ve been delaying gratification; go out and do something nice. But don’t blow it all one night.
You also need to understand that, sure, your company went public, but you can’t sell any of this stock tomorrow, so you don’t want to put yourself at risk to commit to a lot of obligations, in the event that the stock plunges in value.
I’ve seen folks who, before the IPO, gifted significant amounts of stock to family members, and then 2000 happened, and they basically had gifted away all the value that they were going to receive.
Risk planning is the most relevant and prudent way of building a game plan. You have to understand risk early, set up a plan, and then follow through on it, tweaking it as life or career changes take hold.
We’ve seen other individuals who get to the liquidity event and really haven’t dealt with any of that planning. I recall a founder who came to us the week before he was getting married, and said, “I know I need the estate plan you told me about, but actually I failed to tell you that we’re getting married, and I’d like to have her sign a prenup. Can I get one drawn this week?”
Jeff: I’ve saved clients hundreds of thousands and even millions of dollars upon exits, just by doing some fundamental planning prior to an event.
Among the most relevant aspects of planning, even for a founder who’s laden with founder shares, is how they do the 83(b) elections (the official filing to exercise stock options) on their ISOs, and how they take into account their ordinary income and alternative minimum tax (AMT) situation alongside the calendar year, to optimize the amount of option exercise year over year over year.
There are decision points on a continual basis, say, over a two- or three-year period, where you can do a better job of avoiding tax, and also planning for your own personal liquidity.