DISCLAIMER:
Case studies are presented for educational and demonstrational purposes only. Case studies do not reflect an actual client's income and are not to be viewed as a guarantee of future results from hiring Brooklyn FI, LLC for advisory services.
Case Study: Surprise Liquidity Event
Year 1
Meet, Beck!
BECK
Beck is a CMO at Alert, a fintech company. Beck's salary is $230,000 and he was granted 100,000 ISOs at a strike price of $2.90 when he joined the company on January 3rd, 2020.
FMV: $2.90
Beck’s DIY Financial Planning
VS.
BKFi Financial Planning
Let's see what happens when equity experts like BKFi get involved.
Year 2
At Beck's one year anniversary, he vests 25,000 shares. He's excited about Alert's IPO prospects and the company has been growing quickly.
FMV: $5.00
Events
He does nothing, he's not sure what the 30-page equity plan means.
He decided to use his own cash to exercise his 25,000 shares at $2.90. The fair market value has gone up to $5.00 so Alternative Minimum Tax (AMT) will be due.
While there is significant risk in exercising and holding private shares, Beck made this call on his own based on his total net worth.
Action
NOTHING
Exercise 25,000 options for cost of $72,500. Estimated AMT due: $14,700
Cash Paid
$0
$72,500
Shares Held
0 - ZERO
25,000 Shares
Unexercised
100,000
75,000
Post-Tax Proceeds
$0
$0
Income Tax Due
$0
$0
AMT Due
$0
$14,700
Year 3
After raising their Series C in early 2021, Alert decided to do an internal tender offer to allow employees to sell shares to new investors. Employees are allowed to sell up to 20% of their holdings. The price being offered is significantly higher than the FMV at his exercise a year ago. On January 10th, 2022, things are looking up!
FMV: $19.00
Events
He participates in the share sale by doing a same-day exercise and sell that will be taxed at ordinary income (aka short-term) rates.
Sell 20% of holdings, aka 20,000 shares at $19. Because he's selling shares that generated AMT, he gets the AMT he paid LAST year back as a tax credit.
Shares held
0 - ZERO
13,928 Shares
Shares Sold
0 - ZERO
20,000
Unexercised
80,000
75,000
Gross
$380,000
$380,000
Post-Tax Proceeds
$239,400
$318,700
Income Tax Due
$140,600
$0
Capital Gains Tax Due
$0
$76,000
AMT Due
$0
-$14,700
He invests all of his proceeds in a Robinhood account and picks a few safe tech stocks. The FAANG stocks (that would be Facebook, Amazon, Apple, Netflix, Google) have been experiencing stellar growth so he buys in.
He has BKFi invest his proceeds in a broadly diversified portfolio.
Russia invades Ukraine and the stock market dips. Companies withdraw their IPOs and ten years of unchecked growth slips away for many tech companies.
The value of Beck's individual stocks is down about 30%, or about $100,000. He's investing for the long term so he doesn't worry too much but he's not selling at a loss.
The broadly diversified ETFs in Beck's portfolio are down about 10%, but BKFi's trading team aggressively harvests losses and is able to generate about $30,000 in losses while not changing the makeup of the portfolio. Those losses help offset the capital gains tax to the tune of about $7,000 (23.8% capital gains tax X $30,000 in gains).
DISCLAIMER:
Case studies are presented for educational and demonstrational purposes only. Case studies do not reflect an actual client's income and are not to be viewed as a guarantee of future results from hiring Brooklyn FI, LLC for advisory services.
