Before the Liquidity Event: A Planning Checklist for Startup Equity

Key takeaways

The first four items are dated: 83(b) within 30 days of grant, ISO exercises sized to the AMT crossover each year, QSBS clocks started early, and a gifting plan before the valuation jumps.
The tax on a liquidity event is set by decisions made one to five years before it, not by anything done in the month it closes.
After the event, lockups, blackout windows, and 10b5-1 plans govern the sale schedule, and concentration is the main risk.
Set the target for how much to keep before the money arrives; the number gets harder to choose afterward.

When a company announces an acquisition or files to go public, employees start calling advisors. By then the most valuable decisions have already been made, or missed. Equity planning is a sequence that starts at the first grant and runs through the years after the exit, and the checklist below follows that order. It applies to founders, early employees, and later hires alike, though the items weigh differently for each.

At grant

File the 83(b) election if the shares are restricted or early-exercisable. Thirty days. No extension. For founders at formation the tax is zero and the election should be automatic; for employees early-exercising options the spread is usually small. The 83(b) rules explain when it's the wrong move, which at an early stage is almost never.

Identify the option type. ISOs and NSOs have different tax and different exercise strategies. Get the actual grant documents, not the portal summary.

Record the QSBS facts. Issuance date, the company's gross assets at that time, and the business type. Whether the shares qualify for the Section 1202 exclusion is determined now and proven later, and later is when nobody can find the balance sheet.

Each year before the event

Exercise ISOs in sized amounts. Each January, calculate the AMT crossover, meaning the number of ISOs you can exercise before the alternative minimum tax exceeds regular tax, and exercise up to it early in the year. This starts the capital gains holding period and the QSBS clock on those shares while the spread is still smaller than it's going to be. Exercising everything at the event, when the spread is huge, turns the whole gain into an AMT problem or a disqualifying disposition at ordinary rates.

Run the tax projection with the equity in it. A liquidity event in year X is a tax event in year X. The estimated payments, the withholding shortfall on NSOs and RSUs (22% withheld on the first $1 million of supplemental wages against a 37% bracket), and your state of residence at the time of the sale all need to be in the projection. Establishing Florida residency before an exit is a real planning move for people in high-tax states. Establishing it the month before is not.

Plan the gifts. Once an exit looks plausible, gifts of shares to children or to trusts move future appreciation out of the estate at today's lower value and, for QSBS, multiply the per-issuer exclusion. The gifts have to happen before the deal is signed, ideally before the process even starts, and they need a qualified appraisal. The $19,000 annual exclusion and the $15 million lifetime exemption both apply; our gifting guide covers the mechanics.

Set up the charitable vehicle if giving is part of the plan. A donor-advised fund funded with appreciated private stock before the sale produces a deduction at fair market value and avoids the gain on the donated shares. It needs an appraisal and the company's consent to the transfer, which takes months. After the deal signs, the gift is cash, and the tax on those shares has already been paid.

When the event is announced

Read the deal terms for tax. Cash versus stock consideration, escrow and earnouts (taxed when received, sometimes with installment treatment), rollover equity in the acquirer, and how unvested options get treated (accelerated, assumed, or cashed out as ordinary income). Each one has a different tax result and a different timing.

Model the year. The event year usually puts the household in the top bracket and past every threshold at once: 37%, 20% capital gains, 3.8% NIIT, and IRMAA two years later. Anything that can move to a different year, a Roth conversion, a large charitable gift, a bonus deferral, should move.

Decide the keep number. How much of the company's stock, if any, the household will hold after the event. Our rule: keep no more of any single stock than the household could lose entirely without changing its plans. That number is usually far below what employees expect, and settling it before the money arrives makes the sales that follow automatic instead of agonized. The concentrated position post explains the reasoning.

After the event

Respect the lockup and the windows. IPO lockups typically run 180 days, and insiders face quarterly blackout periods after that. A 10b5-1 plan set up during an open window lets sales continue through blackouts on a schedule fixed in advance.

Sell to the keep number, in a tax-aware order. Highest-basis lots first, QSBS lots at or after their five-year dates, ISO shares after their qualifying periods where the concentration allows waiting, and disqualifying sales where it doesn't.

Pay the tax. Estimated payments in the quarter the income arrives, not April. A large event with 22% withholding and a 37% liability leaves a gap, and it surprises people every single year.

Rebuild the plan. The household's balance sheet is different now. The investment policy, the insurance, the estate plan (which may need trusts it didn't before), and the spending plan all get redone. Money that arrives all at once gets spent or lost more easily than money earned over time. The plan is what stops that.

What we do

We keep a lot-level schedule of every client's equity: type, strike, vesting, exercise dates, QSBS status, holding period dates, and basis. The annual tax projection includes an exercise plan. When an event shows up on the horizon, the gifting and charitable steps get executed with counsel. When it closes, the sale schedule and the tax payments run from the plan. This is the core of our equity compensation work, and the reason we push people to start early is everything on this list.

Frequently asked questions

I just found out about the acquisition. What can I still do?

Confirm how your unvested equity is treated, set aside cash for the tax gap, decide the keep number, and, if the deal hasn't signed yet, make any gifts and charitable transfers immediately with counsel. Everything else is for the next company.

Should I exercise all my options before the IPO?

Usually not all at once. NSOs create ordinary income at exercise no matter when you do it, so exercise them when you intend to sell. ISOs should be exercised in sized amounts over years; a big exercise right before an IPO is the classic AMT disaster.

Can I move to Florida to avoid state tax on the sale?

Only if you actually move, well before the sale, and cut ties with the former state. States audit this aggressively around large exits. The Florida residency post covers what a real move requires.

What about a tender offer before the IPO?

A company-sponsored tender lets employees sell some shares early. Selling ISO shares in a tender before the qualifying period is a disqualifying disposition; selling QSBS before five years forfeits the exclusion on those shares. Both may still be the right call for diversification, and which lots you tender matters.

Joseph G. Valerio, CFP®, EAFounder and Lead Advisor at Valerio Wealth Management, a fee-only, fiduciary virtual family office in Miami, Florida. One advisor, credentialed in both financial planning and federal tax. About Joseph

This article is general education, not individualized advice, and it is not tax, legal, or accounting advice. Figures reflect federal law for the year stated and can change. Valerio Wealth Management does not prepare or file tax returns. Speak with a qualified professional about your own situation before acting.