Financial planning and equity compensation: 10 steps to a more productive liquidity event

Key takeaways

Taking the time to get your financial house in order can have a significant impact on the outcome of your upcoming liquidity event.
Understanding the nuances of compensation, stock holdings and asset risks can set you up for success as your liquidity event occurs.
An experienced advisory team can help you develop wealth, estate and philanthropic plans that align with your current and future needs.

Whether it comes about through an acquisition, merger or initial public offering, a liquidity event is an exciting time. As a liquidity event approaches, it’s a great time to bring the focus back to your personal financial needs. Some due diligence now can help you minimize stress, avoid missteps and potentially enjoy significant savings on your taxes. The action plan below outlines the crucial steps to address as you prepare for your liquidity event.

1. Clarify your financial goals

At first glance, clarifying your goals sounds easy but it is often challenging. If you believe a liquidity event is in sight but you’re not sure when it will occur or for what amount, an effective approach is to begin by refining your smaller financial goals, then move on to address your larger ambitions.

Consider what goal you would like to address first. Is it a home, your child’s education or just a much-needed vacation? The act of jotting down your goals in order of importance will get the ball rolling and help you visualize the important decisions to be addressed in the near future.

As you solidify your plans, the elements that support your goals can also be clarified and addressed, such as your tax strategy. Significant tax-saving vehicles such as qualified small business stock (QSBS) exclusions must be properly documented and executed, so it’s prudent to get an early start on this type of documentation.

2. Develop an equity compensation strategy

Start the process by considering what type of equity compensation you have. Do you have stock options, RSUs or a combination of both? If you’re not well-versed in equity compensation, this infographic can help get you up to speed. Once you have a handle on this portion of your compensation, gather your documents on the subject, and review and formulate your strategy with the help of your wealth advisor.

Critical items to discuss with your advisor include:

- When to exercise your options
- The vesting schedule of your RSUs
- The expiration date for your options
- The status of your RSUs following a liquidity event

Most RSUs in private companies have a double trigger (two requirements) to vest. Discussing the mechanics of RSUs with your wealth advisor will help you develop the most effective strategy for your situation. Understanding the tax withholding of your RSUs can be critical. The risks/rewards and tax consequences of exercising your options are additional areas of discussion. Your advisor can help you determine the most beneficial time to make your stock purchase.

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3. Anticipate a period of illiquidity

Unfortunately, many people do not plan sufficiently for this critical time. When a company has a liquidity event, funds may not be distributed immediately. If the event is an IPO, you often must wait six months through the lockup to access your liquidity. If it is an M&A event, you may have portions locked up in escrow. It is wise to plan for these very real possibilities and have access to alternative funds during this phase of the process.

4. Establish a basic estate plan

If you haven’t put an estate plan in place, such as a revocable trust, will, healthcare directive or financial power of attorney, now is an opportune time to do so. A basic estate plan is important for virtually all adults and is a critical component to develop before you begin more advanced planning such as gifting assets outside of your estate.

5. Consider any upcoming gifting goals

Gifting often becomes a significant life goal when our clients are expecting liquidity events. As you anticipate your liquidity event, take the time to consider gifts you may like to make to children or other family members. Vehicles such as irrevocable trusts and donor-advised funds allow you to structure your gifts to suit your specific needs and circumstances. For example, you may want to gift to avoid future taxes or extend certain tax exclusions. No matter what your rationale for gifting, it is helpful to plan well in advance. In fact, it may be most effective to make some of your gifts now.

6. Document the details of your stock holdings

Whether you are a founder and hold shares, an employee that exercised options or an investor that purchased shares, now is the time to make sure that all your financial paperwork is in order. Key questions to consider: Do you have documentation of your share purchases, did you pay taxes, did you take an 83(b) election and, most importantly, are those shares QSBS eligible? Working with your accountant is the most effective way to be sure these questions are properly addressed.

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7. Address any potential asset risks

To mitigate financial risks that arise prior to your liquidity event, be sure to address the following topics:

- Have I done an adequate risk assessment?
- Do I need to retitle assets or consider setting up an LLC?
- Do I have an umbrella policy in place and is it up to date for my current needs?
- Do I have the right amount of life insurance?
- Are there any other risks on my balance sheet that should be examined?

Discussing these issues with your advisor can help you understand where you need to take action.

8. Prepare for a future home purchase

Have you postponed a home purchase because of lack of funds for the down payment? Now is the time to prepare for your purchase. You can make the process go more smoothly by answering a few key questions, such as:

- How is my credit rating?
- How much of a mortgage will I qualify for (this may help you determine how much you need to put down)?
- Have I considered the type of mortgage I want?

And don’t forget to give some thought to the funds needed for move-in, furnishings and any remodeling your home may need.

9. Organize your philanthropic game plan

Frequently, charitable giving is also an important goal for our clients as they approach a liquidity event. Now is also a good time to understand the various vehicles that can help you meet your philanthropic goals, whether that is direct giving, employing a donor-advised fund or even establishing a foundation. Talking to an experienced advisor can help you determine the proper timing for your charitable gifts. It may be most effective to make the gifts just prior to your liquidity event. A bit of guidance and planning can help you optimize the impact of your philanthropic efforts.

10. Assemble your advisory team

If you have not done so already, begin to build your financial team and address the needs I outlined today. As we discussed, there are a few key members to include on your team: Your wealth advisor can help you with financial planning and investing, an accountant who understands your present as well as future needs is a key contributor and an attorney who can help you implement an estate plan that remains effective as your wealth grows is also invaluable.