In an ideal world, the best time to prepare for a liquidity event is well before it happens. The more time you have to think through your options and make a game plan, the better. That gives you more opportunity to act intentionally and align decisions with the rest of your financial life. Depending on the circumstances, you may need the time ahead of a liquidity event to adjust cash flow, prepare to pay a bigger tax bill, or revisit your portfolio’s asset allocation strategy.
But, life happens, and the task of planning proactively might fall to the back burner. Sometimes, liquidity events (like an acquisition) feel like they pop up out of nowhere, making it even more difficult to plan ahead. When you don’t have the luxury of planning ahead, you may find yourself with a handful of shares or a sizable sum of cash wondering, “Well, now what?”
Liquidity events, including tender offers, IPOs, and acquisitions, are big milestones for employees with equity compensation. And depending on the circumstances, the outcome may already be partially decided for you.
Post-event, you may have fewer options than you did before. But what you do have access to now is more certainty around the numbers—how much your shares are worth, how many you retain, how many have been sold, etc. In some ways, this can make it easier to plan your next move.
If you find yourself unsure how to move forward post-liquidity event, here are some things to consider next.
What Type of Liquidity Event Was It?
Not all liquidity events are the same. In fact, the type of event often determines how much control you actually have before, during, and after.
Acquisition or Merger
Perhaps the most straightforward of any liquidity event is an all-cash acquisition.
In an all-cash deal, the acquiring company commonly purchases shares of the acquired company using cash. You’ll typically receive a cash payout for vested shares based on the fair market value of the shares on the date the deal closes.
As an employee of the acquired company, you’ll receive a lump sum payment for your shares. Once that occurs, you’re free to do whatever you desire with the funds. Some employees choose to purchase shares of the new company’s stock, diversify their portfolio with other investments, or spend it on something meaningful.
The acquiring company may decide to do an all-stock acquisition, in which case your existing company stock is converted to equivalent value stock in the acquiring company. This is generally not considered a liquidity event, as your company equity remains otherwise untouched (aside from changing issuers). That said, the tax treatment of unvested equity and the handling of outstanding options can vary significantly depending on how the deal is structured, so it’s worth reviewing the specifics of any merger agreement carefully.
However, if the acquiring company decides to do a mix of stock and cash, you could face a liquidity event—albeit likely on a smaller scale than an all-cash acquisition.
If you’d like to learn more about what can happen during an acquisition or merger, you can find more information here.
Tender Offer
Unlike an IPO or acquisition, you have a choice whether to participate in a tender offer (if one is offered) and transition some of your shares into liquidity. You also can decide how many shares to sell. Most tender offers do have limitations, either on the number of shares sold, number of participants, or both.
If you get the opportunity to tender your shares, don’t pass on it lightly. A tender offer represents one of the only opportunities you’ll have to generate liquidity prior to an IPO (if one even happens).
Say you do participate in a tender offer with little or no prior planning. Now, you’re left with a sum of cash to consider (and a potential tax bill, depending on the status of the shares before tendering). The tax treatment will depend on what type of equity you tendered and how long you’ve held it. Options exercised and tendered in the same transaction are generally taxed as ordinary income on the bargain element, while shares held long enough may qualify for capital gains treatment. Unvested equity typically cannot be tendered at all, which means a tender offer often creates a partially liquid position—some shares converted to cash, others still locked up and subject to future vesting or a potential IPO that may never materialize.
Learn more about tender offers here.
IPO
With an IPO, you might have more options post-event.
If the IPO was recent, you may still be within the 180-day lockup period. This means that even though you own shares of a publicly traded stock and can readily see the value of the shares, you will not be able to sell your shares immediately. For planning purposes, this is a bit of a built-in guardrail, giving you time to consider your next move and prepare accordingly.
It’s not unusual for an IPO to generate significant wealth for employees, often six- or seven-figure payouts (sometimes even more). That windfall of wealth represents some considerable opportunities post-lock-up period. Do you cash it all out? Stay invested for the potential growth? Sell some and diversify? The decisions you make following an IPO have the potential to carry long-term weight within your financial world.
If the lock-up period has passed, you’ll still need to consider whether the available shares belong in your portfolio long-term or if liquidating them better supports your financial goals and full wealth picture.
Don’t forget—participating in an IPO is rare and certainly worth celebrating. While you might feel overwhelmed by the options or focused on what tax consequences are coming, pause and give yourself a pat on the back (or better yet, do something fun for yourself). If you’ve been working intensely long hours and forgoing family time to get your company to this point, taking your kids on the vacation of a lifetime could be a worthy post-IPO purchase.
Once you understand the type of liquidity event you’re dealing with, the next step is deciding how to move forward based on the factors that are still in your control.
First, Focus on Your Goals
Before making any decisions, it’s worth stepping back to ask, “What is this wealth meant to do for me?” That is what’s most important, after all.
The answer might be straightforward enough. Perhaps you’d like to reinvest all or some of the proceeds into a diversified portfolio and continue building long-term wealth through other, less-concentrated investments.
Or, you might use that liquidity to fulfill some of your other goals.
These could include:
Building Your Emergency Fund: It may not be the most exciting thing to do with the proceeds of a stock sale or liquidity event, but consider creating an emergency fund (if you don’t have one already). An emergency fund is an easily accessible savings account or money market account that’s meant to cover unexpected expenses—a roof leak, car troubles, hospital bills, etc. It’s also an important safety net in the event you lose your job but still need to cover the mortgage, utilities, and other day-to-day expenses.
How much to keep in an emergency fund is up to you, but the rule of thumb is to have enough to cover your financial needs for three to six months. The more you set aside, the more you’re protecting your portfolio, retirement savings, and other assets from an unwelcome early withdrawal.
Pay for College: If your kids are veering toward college age, your family may benefit from setting the funds from a liquidity event into a 529 plan or other dedicated savings account.
Funding Retirement: Depending on the size of the liquidity event, you may be able to reassess your anticipated retirement timeline. Alternatively, the liquidity might give you enough flexibility to move to a lower-pressure position. Perhaps with less dependence on your paycheck, you can even transition from full-time to a part-time consultant or contractor.
Philanthropy: If giving generously is important to you, a liquidity event may be the ideal time to fulfill some of your charitable goals. Working with an advisor, you can consider what tax-focused giving strategies work best. Common tools include donor-advised funds (DAF) and charitable trusts.
Just keep in mind, charitable giving is not a “get-out-of-tax-free” card. Tools like DAFs and charitable trusts can make the giving process smoother, especially if you plan on donating stock directly (as opposed to selling and donating the proceeds). And while donations may be tax-deductible, they do not provide dollar-for-dollar tax savings, so it’s worth working with an advisor to understand exactly how a giving strategy integrates with the rest of your financial picture.
Building Generational Wealth: Following a major liquidity event, you might feel compelled to start establishing generational wealth for your children and grandchildren. This can be accomplished in a few different ways, whether you choose to establish and fund a trust in their names, gift outright, or explore more advanced wealth transfer strategies.
There’s no single “right” use of proceeds. But having clarity around what you want this money to accomplish makes every subsequent decision easier.
Evaluate Your Potential Concentration Risk
Concentration risk refers to the risk of holding a significant portion of wealth in a single stock—in our case, employer stock. As a result, the portfolio lacks the diversification needed to buffer losses and pursue growth across different sectors.
Following a liquidity event, it’s important to determine whether concentration risk is a concern. With a tender offer or all-cash acquisition, company shares are often cashed out. Concentration risk may not be as prevalent, though it’s still worth a look if you retained a portion of your shares.
Post-IPO, however, you’ll need to decide how much exposure to company stock you’d like to retain in your portfolio. While there are some personal factors to consider, a commonly cited guideline is that employer stock should not account for more than 10-15% of your portfolio, though the right threshold will vary depending on your overall portfolio size, income stability, risk tolerance, and time horizon. If you’re starting at a high concentration of employer stock immediately following an IPO (say upwards of 80% or 90%), keep in mind that reducing it by such a significant percentage will likely take time and careful tax planning. Rather than focus too closely on a specific percentage, it may be helpful to determine what you’re comfortable keeping and selling both in the immediate future and long-term.
For example, you may need to decide whether to hold shares longer for more favorable tax treatment (and potentially maintain a concentrated position) or sell sooner and diversify the proceeds at the expense of potentially higher taxes.
Here are some more specific considerations, depending on the type of shares you own:
ISOs (Qualified vs. Disqualified Disposition)
If you’re determined to reduce concentration soon after an IPO, your only option with ISOs is to be less tax efficient and pursue a disqualified sale or disposition. This isn’t necessarily a bad thing, and could serve you well in the long run. But it is worth acknowledging that certain priorities, like reducing concentration, may come at the expense of others, like minimizing taxes.
A disqualified disposition occurs when shares are sold before meeting holding requirements of a qualified disposition. In this case, the spread at exercise is taxed as ordinary income, with any additional appreciation taxed as capital gain.
A qualified disposition requires that shares be held for at least two years from the grant date and one year from the exercise date. When these conditions are met, the entire gain (sale price minus exercise price) is taxed at long-term capital gains rates.
Keep in mind, holding onto ISOs may trigger AMT, in addition to increasing concentration risk. When ISOs are exercised and held, the spread between the exercise price and the fair market value is included in the AMT calculation—even though no shares have been sold and no cash has been received. This can result in a significant tax liability tied to paper gains.
RSUs (Short-term vs. Long-term Capital Gains)
With RSUs, you may be able to better balance your desire to reduce concentration risk and balance tax efficiency.
Because RSUs are taxed as ordinary income at vest, your cost basis is reset to the fair market value on that date. Any change in value moving forward is treated as either a capital gain or loss. Shares sold within one year of vesting generate short-term capital gains, while those held longer qualify for long-term treatment.
If you hold RSUs and they drop in value below the exercise price, you may be able to use the capital losses to offset gains. Leveraging this strategy allows you to offload a greater percentage of company stock without incurring more tax liability.
NQSOs (Short-term vs. Long-term Capital Gains)
The spread at exercise is taxed as ordinary income, establishing a new cost basis for the shares. Similar to RSUs, any subsequent appreciation is then subject to capital gains treatment, with the same short-term versus long-term distinction.
The Emotional Component of Concentration Risk
You might feel an especially strong sense of loyalty to your company, especially following an IPO. You’ve put years of hard work, long hours, and personal investment into the company’s success.
Selling shares of stock soon after a liquidity event can feel counterintuitive, or even disloyal to your employer. It’s hard to make unbiased, analytical decisions without letting emotions get in the way.
While you can still maintain a vested interest in your employer, your portfolio should reflect what’s best for your financial well-being long-term—not what you may have an emotional attachment to. Often, that means offloading concentrated stocks and investing the proceeds across a diversified set of assets.
Additional Tax Considerations
Different tax treatments may be applicable simultaneously (or in close succession), as it’s not uncommon for a single liquidity event to trigger multiple types of tax in the same year.
An advisor can help you build a clear projection of your tax exposure, which should take into account:
- Tax treatment (ordinary income, capital gains, AMT, etc.)
- Timing (when tax is triggered)
- Amount owed (the actual tax liability)
For example, vested RSUs may increase W-2 income immediately, while option exercises or staged sales may spread tax across multiple periods. Without modeling these variables in advance, both the magnitude and timing of what’s owed may be underestimated.
Make Estimated Tax Payments
Shares are automatically withheld and sold to cover some tax liability for certain types of equity (including RSUs and NQSOs). The problem is, the mandatory withholding rate is calculated at a flat supplemental rate that may fall short of your actual marginal tax bracket. Identifying and addressing that gap earlier in the year can help to avoid surprises and maintain greater control over your cash flow.
You may need to make estimated payments during the year to address the additional tax liability. Doing so can help protect you from potential underpayment penalties, as well as avoid a surprise bill at tax time (which could create a cash flow challenge).
Consider Safe Harbor Payments
Safe harbor rules can provide a layer of protection. By paying a sufficient percentage of your prior year’s tax liability through estimated payments, you avoid underpayment penalties, even if your final tax bill ends up higher. You may find this strategy helpful in years with large or unpredictable liquidity events, where exact projections may be difficult to plan for early on in the year.
Safe harbor rules protect you from underpayment penalties in the event you:
- Owe less than $1,000
- Already paid at least 90% of this year’s tax bill
- Already paid 100% of what was owed on last year’s tax return
- Already paid 110% of what was owed on last year’s tax return (if your prior year AGI exceeded $150,000)
That last condition is particularly relevant for high earners. If your income was above $150,000 in the prior year, the standard 100% threshold won’t protect you—you’ll need to pay 110% of last year’s liability to qualify for safe harbor. In a year with a significant liquidity event, this distinction can make a meaningful difference in your estimated payment strategy.
Build Cash Reserves for Tax Season
When taxes are triggered before you gain full access to proceeds, this can create an “asset-rich, cash-poor” scenario. This may happen, for example, if you choose to hold vested RSUs or NQSOs, rather than sell right away. And remember, while ISOs aren’t subject to ordinary income tax at vest, choosing to hold rather than sell may incur AMT.
Despite not selling shares, you still need cash to cover the tax liability. Without the proceeds from selling shares outright, you may have to pull from other investment or savings accounts. It could take time to create or access enough liquidity to address your tax bill. The earlier you start preparing, the more flexibility you have to make strategic cash flow decisions ahead of tax time.
Understand Your Options After a Liquidity Event
A liquidity event introduces a new set of important, and often time-sensitive, decisions. But it also brings something that can feel scarce in equity compensation planning: clarity. For the first time, the numbers are, much your shares are worth, what the tax bill looks like, and what you actually have to work with. That certainty, even if the event wasn’t planned for, is exactly what makes thoughtful planning possible. If you don’t have a financial strategy in place, it’s not too late to pause, consider your options, and align your next moves with your goals and financial needs.
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