San Francisco Financial Advisory
- Financial
- Accounting
- Stock Options
- Taxes
- for tech people and founders
ABOUT US
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San Francisco Financial Advisory was founded to serve the financial and tax needs of tech employees and founders.
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Stock options, RSU's, company formation and capitalization, and all of the tax issues that go along with these.
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We know it, we get it done. Period.
"When you need to see the light at the end of the financial tunnel."
OUR SERVICES
Financial
If it's financial, and it's tech, we probably have experience dealing with it.
Accounting
Accounting issues come up with IRS and FTB tax authorities. That's where we can help.
Stock Options
There are many issues in today's equity compensation, including stock options (ISO and non ISO), RSU's, vesting schedules, and regulatory taxes. As our client, our job is to make sure it gets done right.
Taxes
Calculating what you owe, and not a dollar more, is our job. And making sure all of the required tax returns get filed too.
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CASE STUDIES
Case Study #1: Stock option exercise, 6 figure tax bill
Tech client had a preliminary tax bill of 6 figures on exercised stock options.
Solution: We were able to properly document the cost basis in the stock and ISO vs non ISO status, establishing a more favorable cost basis to the client, lowering their tax bill to 5 figures., a significant savings.
Case Study #2: Correcting disallowed Roth IRA contributions
New client came to us after realizing had an over contribution tax issue within a Roth IRA.
Solution: We were able to fix the issue, file the necessary paperwork with IRS, including the appropriate amended tax return, and work with the client’s investment manager. Saved the client numerous penalties, successfully keeping IRS penalties to a minimum.
Case Study #3: The importance of understanding your stock option vesting schedule. Are you leaving money on the table?
Saved client from leaving $350,000 on the table.
Background:
Client reached out wanting to understand their stock options. They were an early stage employee at a start up, that was later acquired by a large publicly traded company, a leader in the industry. The start up was acquired in a majority stock for stock transaction, with some cash consideration paid. How will this affect your taxes?
Let’s walk through the year by year mechanics of the situation. This situation is specific enough to be useful, but generic enough to apply to many tech employees with a similar situation.
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Year 1: Company acquired → You will receive some stock in the publicly traded company and some cash. You will have to pay tax on the cash paid (sometimes called the “boot”). For the stock options that had vested as of acquisition date, these stock options will be exercised at time of acquisition and transitioned to stock (likely in the form of RSUs) in the acquiring company.
Year 2: The public company now offers this employee RSUs. This specific case involved two parallel tracked vesting schedules: stock options in subsidiary company, and RSUs (restricted stock units) in the public company. As time passes, the stock options vest and are exercised if “in the money”. “In the money” meaning, the exercise price (fair market value, aka selling price of the shares) is above the strike price (the price agreed upon at the grant date).
So in this situation, the employee was faced with the tough decision to keep working at their current job or to leave and pursue their dream job –
Client: “my stock option account shows that I have $700k in stock options value in my portfolio. I think I am in a good position to move on. What does this total value mean? How does this work if I leave the company?”
Response: Since you have only worked 2 years out of the 4 year original vesting schedule for your stock options, you only have $350k in liquid stock that has vested. The remaining stock is unvested meaning, you have to work the last 2 years in order to complete this vesting schedule. Your opportunity cost of leaving will be $175k per year for the next 2 years. If you do leave, you will only be able to take what has vested. Unvested shares go back to the company!” In short, it is not necessarily a bad idea to leave, but you should understand the economic costs of leaving for your specific situation.
Solution:
Wound up saving the client $350,000 in stock on the table, which went on to be worth even more. Rumors were strong in the industry that the client’s company may be acquired. In fact, it was, within the next 12 months. Client wound up staying long enough to fully exercise all $350,000 in options when the company was acquired. All options fully vested at acquisition date, with no out of pocket cash on stock options. Showed client how to use RSU sales to cover options exercise that did not have cashless exercise choice. Rest (or work) and vest, you are set!
Case study #4: Cap table re-pricing, how does this affect your stock options?
Savings=client recouped 6 figure of stock value.
What do you do when your company is struggling with valuation? The reality with crashing public market comps, with tech stock indexes halved for the first half of FY22, is that your company’s valuation, especially if private, will likely be affected by this. Whether it is a markdown from the 409A valuation report or a down round for the most recent funding round, the company will likely suffer a drop in valuation. What does this mean for an employee of a private company with stock options? Well simply put, your stock options may be underwater, meaning your exercise price is below the strike price. Let’s keep in mind the underlying math behind stock options. Options are the option, but not the obligation, to buy the underlying stock in the company. It is a right to buy stock in the company at a set price. For example, underwater stock options may look like this: stock option gives you the right to buy stock for $22 a share and its fair market value is $15.
What does this private company do to assuage the concerns of angry employees with worthless stock options? They get a 409A valuation report with the latest fair market value. A 409A report is issued by a 3rd party valuation firm, hired by management team, whenever the company goes through a significant event that would affect valuation, and usually performed at least once a year for tax purposes. Once the company has an established fair market value, they can get the board of directors to issue new stock options to employees at an appropriate strike price, that makes the shares worth something. This can be controversial and difficult to perform the accounting; however, it can be necessary and a normal course of action for companies in this situation. If you are an employee in this situation, you should listen to what is happening in the company and understand what this means for you.
Solution: Early stage employee and consortium, was able to convince management to get a 409A valuation report and issue newly priced options.
Case study #5: Exercise window of stock options, and if you leave the company before they are fully vested.
Key takeaway: know your exercise window, when you initially accept a job offer with your new company, not when you are leaving the company.
Saved the client 6 figures.
One additional consideration: always know the exercise window of your options. The exercise window is the length of period you have to exercise (to pay) for your options from the day you officially leave your company. Usually, this has been 90 days historically for many companies, meaning you have to cough up the dough for your stock options within 3 months. After this and your options are not exercisable. However, some companies have started offering more friendly exercise terms, even as high as 10 year windows. There are many case studies on the downsides to stock options when an employee leaves. Many a tech employee have left behind 7 figure payouts because they couldn’t afford the exercise price and related tax bill for their stock options.
The takeaway lesson from this is to know your exercise window, when you initially accept a job offer with your new company, not when you are leaving the company. You should know before accepting a job offer: Is this company employee friendly? Do they want employees to share in the stock option pot of gold or hoard it? Have they thought ahead about stock option terms?
Solution: In this case, we were able to show our client that they could still exercise their options, 1 year after exit, and would not have to forfeit them. Savings=6 figures.
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