Over the past few months, we have been discussing pre-IPO stock option compensation—a lot.
Educating yourself on the intricacies of IPOs, RSUs, and ISOs is highly beneficial for your future and can save you thousands of dollars (especially if you currently work for a pre-IPO company).
With that said, many of our readers will likely find it impactful and educational to review a real-world example.
There is no better example of a pre-IPO company than ThoughtSpot.
Let’s dig in.
A Look Inside ThoughtSpot—When Will It Go Public?
At the most basic level, Thoughtspot is a technology company that produces business intelligence analytics software. In their words, “ThoughtSpot exists to create a more fact-driven world through simple, yet easy to use technology.”
At the direction of CEO and Co-founder Ajeet Singh, the company has seen rapid growth since its inception in 2012. The company most recently raised $248 million in 2019 as part of its series E funding round. That funding round valued the company at nearly $2 billion.
As it stands today, Thoughtspot is set to IPO in late 2021.
As an employee of Thoughtspot, you may be thinking, “What does this all mean to me?”.
Do You Have ISOs?
If you need to brush up on the nuances of Incentive Stock Options (ISOs), we encourage you to revisit our recent post detailing how to handle these types of options.
In short, ISO’s give you the option to buy company stock at a set price (the exercise price) at some point in the future.
As you can imagine, the difference between the exercise price (your cost) and the market value of the stock on the date you exercise represents your “profit” from the transaction (aka the bargain element).
If you are currently working at Thoughtspot and are entitled to ISOs, here are a few things you should consider:
- Cost to Exercise: As we mentioned above, ISOs give you the option to purchase the stock at a set price. You must ask yourself, how much will it cost you to exercise those options? Do you have that cash on hand? What percentage of your net worth will that makeup? Can you afford to lose some or all of this investment?
- Taxes: If your exercise price is lower than the market value of the stock on the date of exercise, you may owe taxes on that transaction. This is where AMT comes into play. Alternative Minimum Tax (AMT) is a separate tax system that recalculates income tax after adding certain tax preference items to your adjusted gross income. Unfortunately for high-income earners, you may owe this tax before you can sell the stock itself! To make matters more complicated, you could also owe taxes once you sell your stock post-IPO. Have questions? Stick with us; we’re happy to help!
- Ability to Sell: Will Thoughtspot have a “blackout period” after the IPO date? In other words, will they restrict the sale of your ISOs for any period? In the time between the IPO date and the end of the blackout period, the price of Thoughtspot stock could fluctuate tremendously, leaving your potential profit on shaky ground.
RSUs About To Vest? How To Handle It Like A Pro
Like the ISOs discussed above, you can always jump back to our previous post on pre-IPO RSU’s for details on Restricted Stock Units.
To review, RSUs are pretty different from ISOs. You should think of these stock options as you think about your annual bonus.
You do not need to purchase any shares with your own funds. Shares are granted to you, and once vested, you will pay income tax on the market value on the day of vesting (number of shares x stock price = taxable amount).
The primary thing you need to be thinking about is what you are going to do once your RSUs vest.
A few tips and considerations:
- Concentration Risk: Be wary if you have more than 10% of your portfolio allocated to a single company. It is not uncommon for pre-IPO tech employees to have the majority of their net worth invested in the company that they work for. As you can imagine, there is a great deal of risk associated with this type of highly concentrated investment.
- Taxes: Consider the tax burden from your RSUs. Did you sell some of the shares to cover the future tax burden? If you plan to hold some of the stock, can you do so for at least a year to obtain long-term capital gains tax rates?
- Portfolio Construction: Once you sell your RSUs, how are you going to invest the proceeds? Will you utilize ETFs? Mutual Funds? Individual stocks? Cryptocurrency?
IPOs are A Big Deal—Plan for It
With the Thoughtspot IPO expected for late 2021, employees should be trying to nail down the plans for equity compensation.
What are your specific short and long-term goals? What opportunities can you glean from your stock options? How can you mitigate your tax responsibilities?
Given the amount of money at stake, it is likely a good idea to consult with a professional who has been there before. At Woven Capital, we specialize in stock compensation for tech professionals.
We love serving the tech community and take pride in our ability to help them make the most of their financial opportunities. If you are a tech professional with stock compensation complexities, schedule a call with us today and learn how to make the most of your employee stock options.