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How Private Company Employees Can Potentially Create Liquidity

Liquidate private stock and repay with an IPO.


As wealth managers working extensively within the pre- and post-liquidity planning environment, we often encounter situations with executives, founders, and early employees of startups and privately held companies that have tremendous wealth on paper but no liquid resources. In essence, they are asset rich and cash poor. In the past, if employees wanted to exercise equity before an IPO, there were limited options for shareholders, which meant they would likely have to absorb large tax payments and exercise fees out of pocket. This problem has plagued shareholders for decades and forced many private company employees to wait for an IPO to exercise.

Historically, shareholders have limited choices in exercising private stock. The problem is further exacerbated by rocketing internal 409A valuations, which make exercising increasingly expensive leading up to an IPO. With an average annual salary of below $200K,1 many tech employees cannot afford their exercise costs, which can run into the millions, and even C-suite executives may be challenged to come up with the cash required to exercise their options.

Further compounding this problem is the lack of alternatives for shareholders. Other options, like secondary market sales, not only can result in suboptimal tax consequences and broker fees, but they do not allow shareholders to participate in any potential growth of their stock. Often, these practices also violate share-transfer policies mandated by the company. We always advise clients to read the fine print when it comes to the restrictions of their holdings and talk with a CPA. Those in this position should start planning at least 6-12 months prior to any anticipated event and consider the bigger picture of estate planning as it relates to their overall balance sheet.




Oppenheimer & Co. Inc. does not provide legal or tax advice, but will work with your other advisors to assure your needs are addressed. The opinions of the author expressed herein are subject to change without notice and do not necessarily reflect those of the Firm. Additional information is available upon request. Investors should review potential investments with their financial advisor for the appropriateness of that investment with their investment objectives, risk tolerances and financial circumstances.

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