Here’s how current and former employees can avoid high taxes and maximize their financial gains from the transaction.
Stripe employees and alumni were recently met with a tender offer by the fintech, enabling them to sell restricted stock units (RSUs), shares, and options expiring in the next two years for a potentially big payday. (In case you missed it, my colleague, Chelsea, wrote about the deal in her last post.)
When it comes to how much and what exactly to sell, you’ve got options to weigh, and they’re not ones you should take lightly. The decisions you make in preparation for Stripe’s tender offer can also aid your preparation for their eventual IPO.
Determine the best path forward for your unique circumstance with these 7 steps, and more detailed insights at the end.
7 things Stripe employees & alumni should do now
1. Identify the impact of your RSU release on your 2023 taxes
You should know if Stripe’s sell-to-cover is enough or if you have a withholdings gap. Get an idea of what your tax return will look like a year from now. If you’re going to have a balance due, you must prepare for that now by selling some of your equity in the tender offer.
2. Get organized
Identify and organize all your Stripe equity by type:
- Qualified small business stock (QSBS)
- Shares you’ve held for more than one year (long-term capital gains shares)
- Shares you’ve held for less than one year (short-term capital gains shares)
Then, identify vested but unexercised options expiring in 2023 or 2024 that could be incentive stock options (ISOs) or non-qualified stock options (NSOs). Note that options may be irrelevant to this tender offer because Stripe has been granting RSUs for a long time and we’re aware most of our clients don’t have options that will be eligible to sell.
You’ll also want to figure out how many of your vested RSUs will be released as part of the tender offer.
Finish getting organized by grabbing your 2022 tax return and your most recent pay stub. After you’re done selling in the tender offer and it closes, get a transaction confirmation once it’s available.
3. Determine how many to sell
Calculate what your total exposure to Stripe is by adding shares in vested equity and unvested equity. This will determine how much you have and how much of it you want to sell. Once you know how much to sell, you’ll need to figure out how to do that.
4. Budget for taxes
Once you’ve gone through the tender offer, you’ll need to budget for taxes. Set that cash aside in a high yield savings account and be sure to identify whether you’ll need to make estimated tax payments to avoid an estimated tax penalty.
5. Pay for your goals
Once your taxes are taken care of, you can figure out how much cash you have left to fund anything from buying a house to paying off your student loans.
6. Fill your emergency reserve
Knowing you have emergency funds can give you some much-needed comfort and peace of mind in this layoff-heavy season.
7. Fund your career replacement portfolio
Even if you’re unable to take this step today, it’s important to understand you have this option. Figure out how much money you need to become financially independent, to the point where you have the freedom to stop working and continue to fund your lifestyle.
Here’s more of a deep dive on figuring out how many and what to sell:
How much you should consider selling
Any time RSUs are being released and you’re considering how much to sell, the first thing shareholders absolutely must be prepared for is taxes. Just because Stripe is withholding shares to cover taxes in a sell-to-cover, that doesn’t mean they’re withholding enough to cover all taxes. Unless you’ve elected for a higher supplemental withholding rate, there’s a good chance Stripe will only withhold 22%.
Whether or not you sell RSU shares in the tender offer, you’re going to have the same taxable income, which is based on the value your released RSUs hold. Your taxable income is calculated by multiplying the number of RSU shares being released, by Stripe’s tender offer share price of $20.13. As a result, there’s a good chance you’re going to be pushed into a tax bracket higher than 22%, which is the standard federal withholding on supplemental wages. What does this all mean? Before you sell anything in Stripe’s tender offer, you may have a tax bill to prepare for. That’s why it’s critical you know what the taxes are on the release of your RSU shares and how you’ll pay them.
Once you’re prepared for the taxes you’ll owe, your focus should shift to strategy. Think of strategic moves being in two broad categories: selling everything and selling some.
You can sell all your vested RSUs that are releasing as part of the tender offer, exercise and sell any eligible options, or sell all shares that you’re holding from the past exercise of options. Selling everything can feel drastic, but it’s not an inherently bad choice.
Here are reasons why you may want to sell everything:
- You have a specific goal you’re trying to fund, like the purchase of a house or paying off student loans.
- You simply don’t want to worry about Stripe’s looming IPO.
- To fully fund your emergency reserve. If 2022 taught us anything, it’s that overnight, you can face a layoff or see the value of your investments plummet. Having an emergency reserve prepares you for the unexpected. Your emergency reserve should contain about 20% of your wages (locate your wages on your W-2 and multiply the number by 20%), or 10-20% of your outstanding mortgage balance (look up your current mortgage payoff and multiply that number by 10 or 20%). When choosing how to calculate your emergency reserve amount, I recommend using the method that results in a larger amount.If you’re funding it through Stripe’s tender offer, once the tender offer clears and you’ve set aside enough to cover your taxes, take whatever’s left for your emergency reserve and place it in a high-yield savings account. If you have a lot of Stripe equity, you may be able to fund both your emergency reserve and your career replacement portfolio. Funding the latter could give you the freedom to not work. One easy way to calculate your career replacement portfolio amount is to determine how much money you need to live on annually (this may be your salary) and divide it by .04 (based on the safe withdrawal rate of 4%). For example, if Leah’s salary is $200,000, she’ll divide that by .04, which means she should have $5,000,000 in her career replacement portfolio.
You may already know you only want to sell some of your shares, but how many is “some” to you?
Identify what you might want to hold onto, or what I call “forever shares,” which I recommend to most of my clients. These are shares you hold onto indefinitely because you recognize that it’s possible for Stripe to evolve into one of the most valuable companies in the world and significantly increase the value of your shares. Forever shares are a percentage of your shares that you don’t anticipate selling in your current plan, but that you would sell eventually. You’ll want to designate between 10% and 30% of your shares as forever shares. When you calculate that percentage, don’t just consider the shares you hold today; if you still work at Stripe and you have unvested RSUs, include those shares in your calculations.
When determining how much to keep and sell, consider selling enough shares to exercise and hold your ISOs. If you’re a current Stripe employee who’s been there for a long time and has ISOs that are vested and that you haven’t exercised, this could be a good time to take some cash out of the tender offer by selling enough of your RSUs that are pending release to be able to exercise and hold your vested, unexercised ISOs. With this strategy, you’re effectively recycling for taxes, meaning you’re selling a portion of the Stripe equity you have and taking the cash to effectively recycle another portion of your equity (the incentive stock options). The hope of this strategy is that in a future sale of those ISOs, they’ll be qualified for long-term capital gains and that — as a result of selling some now to exercise and hold others — you’ll pay less taxes in the end.
If you’re considering selling some of your Stripe equity to exercise and hold your ISOs, there are two things you should calculate to determine the cost you’ll need to cover:
- Exercise cost for those incentive stock options
- Alternative minimum tax (AMT) you’ll owe if you exercise and hold your ISOs
If you’re still working at Stripe and you’ve got unvested RSUs, I recommend you calculate the total equity you’ve been granted — both vested and unvested — using the tender offer price of $20.13. Then, look into what percentage is vested and is available to sell. If the majority is unvested and unavailable to sell, I’d advise you to consider selling most, if not all, of the vested portion. That’s because it’s only a small portion of your total equity and you’d be able to decide what to do with the rest of your equity if you stay at Stripe through a future liquidity event.
The last thing you can think about here is to just sell half. “Just do half” is one of my colleague Jackie’s favorite sayings around decisions of how much to sell. Think about it this way: if Stripe’s future is bleak, you can be glad you sold half of your shares. Conversely, if the stock market goes up and Stripe eventually goes public at a much higher price, you can be glad that you only sold half before the IPO. When you don’t know how much to sell, consider just doing half.
What to sell
Now that you know how much of your equity you want to sell — whether it be a number of shares or a percentage — the next step is to figure out how you’ll sell. You’ll need to consider what types of equity you have available and decide which ones to sell.
The first step is to identify what you have that’s eligible to sell in Stripe’s tender offer. What we know about the tender offer so far, and what’s eligible to sell, is:
- Shares you’ve acquired from exercising stock options.
- Vested RSUs. These are also known as double-trigger RSUs, meaning they have a time-based vesting schedule and require an event-based trigger before they’re released.
- Vested, unexercised options that expire in 2023 or 2024, according to information gathered from our clients.
When planning how to sell your chosen number of shares, it’s time to consider taxes. Taxes won’t tell you what to do (i.e. how much to sell), but once you know the amount you want to sell, taxes can help inform how you do it. Remember the two most important factors that determine your Stripe equity’s financial outcome: price and shares.
Price x shares = gross payout
Your taxes will only ever be a percentage of the gross payout. When you hear about “changing things around the margin,” that’s what we’re discussing here with taxes. We’re just changing the gross payout slightly to the net payout. Taxes are never the most important factor to determine what and how much equity you should sell. Price is always the most important determinator. So, if you think $20.13 is a great share price and that it’s the best price you’ll get, sell everything except your forever shares. The number of shares is the second most important factor when it comes to recycling your options and potentially lowering your future taxes, however you should be careful about how many of your shares you need to sell in order to recycle your options.
When determining what to sell, it’s also important to consider RSUs’ impact on your taxes.
If your RSUs drive you into the top tax bracket, they’re the first shares you need to sell. If the amount of equity you plan to sell is greater than all your RSUs, then sell all your RSUs. If you’re holding QSBS, which I only expect a small subset of Stripe employees or alumni to have, it’s the second thing you should consider selling after all your RSUs are gone. The third shares you’d want to sell are long-term capital gains (LTCG) ones, fourth would be NSOs that expire in 2023 and 2024. Lastly, instead of selling ISOs, I recommend exercising and holding them.
We’ve covered a lot of ground so far, but I want this blog post to be chock-full of all the info you need to make financially sound decisions.
(St)ripe with possibilities
This tender offer is facing you with tough choices that can get confusing with so many factors at play. There’s no clear-cut best practice for every current and former Stripe employee, which is why it’s critical for you to receive individual advice.
If you’re not currently working with a financial advisor who understands your situation, I’d love to talk to you. KB Financial Advisors is currently working with Stripe employees and alumni, and we’ve helped countless other tech employees through tender offers like this one. While it’s intimidating, the tender offer opens the doors to so many exciting possibilities, and we’re here to support you.
Book a call today to talk to myself or another expert on our team about your plan for the Stripe tender offer and beyond.