Navigating Post-IPO Wealth: Tax Optimization and Portfolio Strategy for a $1.5M Income Event

When a company goes public, it's often celebrated as a major milestone—and rightfully so. But for employees holding equity compensation, an IPO can also trigger a significant and immediate challenge that extends far beyond taxes. The "double trigger" event that releases restricted stock units (RSUs) can suddenly catapult someone into the highest tax brackets while simultaneously creating dangerous concentration risk and complex portfolio management decisions. Below is an example of how you can make the most of this situation by taking the time to plan.

Financial Profile: Success Brings Complexity

Role: Engineering Director (let’s call him Mike) at a recently public technology company. He lives in CA.

Income/Equity:

• Annual salary: $350,000

• IPO income spike: Additional $1.5 million from double trigger RSUs

• $3 million in company stock (previously exercised ISOs and NSOs)

• $1 million in unexercised NSO options with low exercise basis

Challenges:

• Immediate tax bill from RSU income spike

• Concentration risk in company stock

• Optimizing overall wealth strategy/portfolio for long-term goals

Mike came to me because he was struggling with tax planning - so that’s what we worked through first. But he had missed that he even more so needed to consider the single-company risk he was carrying in his portfolio, which became relatively urgent with the IPO. I walk through how we tackled both of these items for him below.

Note: This often happens when I first meet with a client; there are obvious immediate money issues they need help on (much higher tax bill than usual), but other issues like portfolio diversification aren’t top of mind. They only become obvious if your concentrated stock tanks - but by then you may have already lost significant wealth. I’ll get into the importance of thinking about the worst-case scenarios as much as the best-case scenarios later in Mike’s story.

Tax Strategies

The Basics

We started with the fundamentals, to make sure there weren’t any obvious missed opportunities: ensuring he and his spouse contributed the maximum to their 401(k) and other tax-advantaged accounts. These contributions are low hanging fruit — but in his situation also barely made a dent in a large tax bill when you're looking at an additional $1.5 million in taxable income. That’s where we got more advanced.

Strategic Philanthropy - DAFs

Mike had always been charitably inclined, but the IPO year presented an exceptional opportunity to maximize the impact of his giving while achieving substantial tax benefits via a donor advised fund (DAF). Due to the tax savings, every ~$100 he gave to charity only cost him $13. Here’s how:

• By donating appreciated stock rather than selling it, he avoided paying long-term capital gains taxes and state taxes he would have owed on the sale

• The donation created a substantial charitable deduction that helped offset his earned income, providing relief from the highest marginal tax rates

• DAFs allow you to distribute the funds to charities over time, giving Mike flexibility to basically over-contribute to the DAF in his extra-high income year, but then spread out the charitable giving over multiple future years (rather than making an extra-large sized contribution in that year)

Beyond Traditional Deductions

A more uncommon, but powerful, income reduction approach that we explored was a specialized hedge fund that can generate ordinary losses and offset high earned income, rather than just capital gains. These specialized hedge funds are setup in a special way and employ a unique strategy that utilizes derivatives to produce (i) ordinary income losses, and (ii) short term capital gains. When paired with a strategy that neutralizes the short term capital gains, the combined impact can significantly lower the amount of taxable income one has.

ISO/NSO Options & Equity Optimization

ISOs: Mike had more than $500k in federal and California AMT credits from previous ISO exercises. To maximize AMT credit recovery, we focused on tax lot management, intentionally selling out (and not donating) certain tax lots/shares that would maximize the amount of AMT recovery.

NSOs: The important issue here was that Mike’s NSO tax basis calculations were incorrect (a common issue). We worked with his accountant to correct NSO basis calculations, and proper basis calculations prevented double taxation on the same economic gains. Otherwise, these were shares in the company and we analyzed them holistically as part of his concentration risk profile.

Long/short (130/30) Strategy

After working through the above income tax planning, we pivoted to reducing Mike’s long-term capital gains bill. The 130/30 strategy involves taking an extra long position in attractive securities (e.g. 130% long exposure versus typical 100% long), while simultaneously short selling ~30% of stocks seen as less attractive ones within the same industry/sector (e.g. 130% long, less 30% short = 100% long). This approach served dual purposes:

• Creates a more balanced and diversified investment portfolio

• Generates a higher amount of capital losses that we could use to offset his capital gains when he sold his company stock

Essentially, this strategy helps reduce the tax impact of diversification while building long-term wealth.

Exchange Fund

For a portion of Mike’s highly appreciated company stock that he wanted to diversify, but wasn't ready to sell immediately, we utilized an exchange fund to minimize capital gains tax.

The exchange fund allowed Mike to contribute his company stock into Limited Partnership that provided a diversified number of stocks, without recognizing immediate capital gains. While exchange funds involve certain restrictions and aren't suitable for everyone, they provided Mike with immediate diversification benefits while deferring the tax impact.

Wait…What’s The Plan for the Realized RSUs?

We’d helped Mike with what he saw as the main problem, the upcoming large tax bill. But this left the elephant in the room - exactly how much was he going to sell, when was he going to sell it, and why? He needed to develop a strategic selling plan to manage concentrated company exposure.

Mike faced a classic concentrated position problem—too much wealth tied to a single company's stock. While he believed in his company's long-term prospects, having virtually all his liquid wealth dependent on one stock's performance created unacceptable risk that needed to be addressed through a selling strategy. We’d already started diversifying Mike’s portfolio via donating some shares, the 130/30 strategy and leveraging an Exchange Fund, but he needed a specific plan (or at least a roadmap) for what to do with the remainder of his company stock (which was still large).

We developed a selling plan guided by what we call regret minimization: a framework that balances the fear of selling too early against the risk of not diversifying enough. After extensive modeling and discussion about his objectives, we settled on selling 25% of his stock almost immediately, and another ~50% of his company position gradually over 2.5 years. This structured selling approach tied directly to his personal financial plan and his risk profile/opinions about his company’s worth:

• Immediately selling 25% gave Mike extra income to help with his tax bill and a few immediate financial needs, and reduced his exposure in case the company stock materially declined.

• The 2.5 year timeline for ~50% of his RSUs meant Mike would benefit from cost averaging, reducing the impact of short-term stock volatility while achieving roughly the average price over the period. Via this strategy, the sales would generate the funds needed for his financial plan’s near-term objectives (catch up on retirement savings and a down payment for a new home).

• The ~25% he planned to hold long term, combined will all his implicit ownership via granted but not yet vested RSUs, allowed him to retain enough company stock to participate in potential future appreciation. This was important to him because he was relatively confident the company would perform well (but not so confident he was willing to hold more and risk the money needed to meet his near-term financial/life goals).

The plan struck a balance between financial security and maintaining upside exposure—exactly what comprehensive wealth planning should achieve when dealing with concentrated stock holdings.

Disclaimer: This communication is for informational purposes only, and may utilize examples to help convey the mechanics. It is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.