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Navigating concentrated stock positions as a piece of your long-term financial plan
IPOs, mergers, acquisitions and buyouts can convert executive compensation and concentrated stock positions into significant wealth for founders, investors, board members and early employees. This case study provides a holistic overview of how partnering with a trusted advisor allows you to focus on the work that led to your wealth. By working with SVB Private to manage your new wealth, you can continue doing what you do best.
Here at SVB Private, we frequently advise clients who have successful careers and have accumulated benefits from their organization, like stock options, and are potentially looking to unwind those benefits to diversify their portfolio. In this case, a client served as a board of director for almost a decade at a biotech firm. During that time, this client worked diligently and received a number of stock awards as part of their executive compensation. After listening to their goals and concerns, we were able to forge a plan together that best aligned with future plans.
The concerns: Maximizing the retention of executive compensation
Our client partnered with us to address the primary issue of retaining as much of their executive compensation as possible in a manner that suitably balanced their concerns. After closely working with them, the following apprehensions became clear:
- The market could impact their stock sales for their former company.
- The optics around their stock sale needed to be positive with their peers.
- The ownership stake now comprised the majority of their net worth.
- Their departure accelerated their option conversion timeline.
- A tax hit was looming.
The investor had never sold any of their stock or options; therefore, they had accumulated a sizable stake. And as a former board member, they were very aware that their actions could be interpreted as a loss of faith in the firm. Focused on getting the job done, achieving results, growing the business and deepening their relationships with colleagues, they wanted to honor both their work and those they had worked with.
Although the company had an IPO a few years ago, its stock price recently skyrocketed due to recent developments. Their stake now translated into significant net worth, which they definitely hadn't anticipated or planned for. Now that the client had it, they wanted to make sure that they retained most of it. They were also operating under a deadline. When they left to start another firm, their options' sell clause was triggered. Our client needed to make a decision soon otherwise, they'd potentially be exposed to a huge tax burden, especially because the non-qualified stock options they'd received are taxed as ordinary income and not as capital gains.
The solutions: Crafting and implementing a plan
While there were many ways to approach the situation, our team was able to come up with a few solutions. Working collaboratively, we were able to map out their objectives in all major areas and conduct an in-depth risk tolerance assessment. Over time, we determined what portion of their portfolio contractually needed to be sold and explored tax mitigation strategies through asset and estate planning.
We also helped them create a vision for the family and their estate. Using software to illustrate different scenarios and aid planning, we dug into the what, the why and the how for their family, career and philanthropic desires. This programmatic approach helped them shift from a work, loyalty and career success-driven perspective to a long-term, family-focused one that incorporates overall legacy and multigenerational wants.
Because our client strongly believed in their former company's ongoing growth prospects, they wanted to retain the majority of their stake while reducing their exposure and protecting some of the upside. We partnered to better understand their point of view on how the company was doing internally. We, then, used proprietary software to perform iterative technical and fundamental analyses on the company's forecast.
This process helped us to quantify their overall risk tolerance and convert that into the size of the investment they would retain in the firm as well as how much stock from which tranche actually needed to be sold to cover the taxes and when. To support long-term goals, our team of advisors crafted a complete asset and estate plan that mitigated the taxes to the largest extent possible while fulfilling our client's long-term overall goals.
The results: Leveraging an advisor's expertise
Once our client's tax burden was minimized, their emotional burden was reduced as well, allowing them to focus on what was most meaningful to them — their work.
By offering advisory on creating the proper vehicles in which to hold assets, determining a conversion schedule and referring them to the best external legal and tax advisors, we helped to reduce their tax burden. Now, they have an estate plan that includes a sell down schedule to reduce their concentrated stock positions over time. The internal concern they felt about how their selling would appear to their peers is now gone. And their relatively automated plan supports their family's goals and is reviewed quarterly or as their needs change.
If your compensation has provided you with concentrated stock positions or other executive compensation that is nearing windfall status, such as a pending IPO, acquisition or a highly received new product, we can help you develop and manage a plan that meets your unique, specific needs. Partner with one of our trusted advisors to learn more about managing your wealth through the lens of concentrated stock positions.