Confused About Your Private Equity? Here’s The Roadmap To Getting It Right
True Root Financial is a financial advisor and financial planner based in San Francisco, CA. We serve clients across the globe.
Many employees get excited about owning shares but have no idea how to manage them, especially when the stock isn’t publicly traded yet. Let’s break down how to make smart, strategic decisions about your private company equity, before the big day arrives.
If you are a tech executive interested in learning how we can help you claim your financial independence by investing wisely, minimizing taxes, and maximizing your equity compensation, please book a no-obligation call here.
Before making any moves with your private company stock, watch this to understand timing, selling strategies, and reinvestment best practices.
1. Understand What You Actually Own
Equity compensation comes in several forms, and each one works differently:
- Stock options (ISOs or NSOs): Give you the right to buy shares at a fixed price later.
- RSUs (Restricted Stock Units): You receive shares once they vest, no purchase required.
Each type has unique tax rules and liquidity limits. Before doing anything, read your grant agreement carefully, or better yet, work with a financial advisor experienced in equity compensation.
Example:
Meet Ross, a senior engineer at a fast-growing fintech startup. He received 20,000 ISOs at a $2 strike price when she joined. Three years later, the company’s internal valuation jumped to $15 per share.
Ross was thrilled, on paper, his equity was worth $260,000!
But he made a common mistake: he exercised all his options without realizing it would trigger the Alternative Minimum Tax (AMT), leaving him with a $40,000 tax bill and no way to sell her shares because the company was still private.
If he had planned earlier with a tax advisor, he could have exercised gradually or used an early exercise strategy before valuations spiked, reducing his AMT risk.
2. Know When Your Equity Becomes Valuable
Private company stock is like a lottery ticket that hasn’t been drawn yet — it might pay off, but it’s not liquid until:
The company goes public, Gets acquired, or Allows secondary sales.
Until then, your shares have potential value, but you can’t use them to buy a house or pay bills. That’s why planning ahead, for taxes, diversification, and liquidity, matters long before any IPO rumors surface.
3. Prepare For Taxes Before You Exercise or Sell
This is where equity gets tricky. Even if you can’t sell your shares yet, exercising options or vesting RSUs can create taxable income. Here’s a quick breakdown:
- ISOs: May qualify for long-term capital gains if held long enough, but can trigger AMT when exercised.
- NSOs: Taxed as regular income at the time of exercise.
- RSUs: Taxed when they vest, based on their fair market value.
Key takeaway: you can owe taxes without having cash in hand.
Before exercising, run a tax simulation with your advisor. They can help you decide when to exercise, how much, and how to manage the potential AMT bill.
4. Don’t Let Concentration Risk Sneak Up on You
If most of your net worth is tied to your company’s stock, you’re at risk.
Private companies face volatility, markets shift, funding dries up, leadership changes.
When your company goes public or you get a chance to sell, use that liquidity to:
- Diversify your portfolio across multiple assets.
- Reinvest some gains in index funds or real estate.
- Set aside emergency savings outside your company stock.
Remember: your paycheck already depends on your employer, your future wealth shouldn’t too.
5. Plan Ahead For Liquidity Events
When your company announces an IPO or acquisition, decisions happen fast. Should you sell right away or hold for potential upside?
A solid liquidity plan ensures you don’t act emotionally.
Ask yourself:
- How much will I sell immediately to cover taxes and major goals?
- How much will I hold long term?
- What’s my risk tolerance if the stock price drops post-IPO?
Even selling in tranches (over time) can help smooth out volatility and reduce your tax burden.
6. Work With The Right Experts
Equity compensation isn’t something you should manage alone. The right team can help you protect your wealth and avoid unnecessary stress:
- Financial advisor for tech or startup employees.
- Tax professional familiar with AMT and multi-year planning.
- Estate planner if your equity forms a big part of your assets.
These professionals help you turn complex paperwork into clear, actionable strategy, tailored to your life goals.
7. Don’t Wait Until IPO Day
The biggest mistake employees make? Waiting too long.
By the time your company goes public, your flexibility is gone, and the tax bill might already be locked in.
Start early:
- Track your vesting schedule.
- Know your strike prices.
- Review your 83(b) elections and tax exposure annually.
The earlier you plan, the more control you’ll have when that big exit finally happens.
Your Next Steps:
Managing equity compensation at a private company is part art, part science. You can’t control when your company will go public, but you can control how ready you are when it happens. Like Ross learned, proactive planning turns confusion into clarity, and potential into real, lasting wealth. Book a call below:
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