The worst time to plan for a liquidity event is after it. By the time the wire lands, the tax year is set, the holding periods are what they are, the trust that could have held the shares does not exist, and the only question left is where to put the cash. Almost every decision that makes a difference has to be made before the deal signs. This is the list we work through with founders and executives who can see one coming.
Twelve to twenty-four months out
- Know what you hold. Grant dates, exercise dates, cost basis and holding periods for every lot. Whether any of the stock may qualify for the small-business stock exclusion, and what would disqualify it. This is a spreadsheet, and it is astonishing how few people have it.
- Decide the structure before the value is known. Trusts that move future appreciation out of an estate, or spread a gain across family members, work best when the shares are worth less than they will be. Once a term sheet exists, the value is no longer arguable.
- Exercise what should be exercised. Options exercised early start the clock on long-term treatment and, for some, on the exclusion. Exercising costs cash and creates tax now; whether it is worth it is a calculation, not a feeling.
Six months out
- Model the tax. Federal, state and the alternative minimum tax, under the deal as it is likely to be structured. Cash versus stock consideration changes everything.
- Plan the charitable giving. Appreciated stock given before a sale is worth far more to a cause, and to your tax return, than cash given after it.
- Write the investment policy for the proceeds. What the money is for, how much must stay liquid, how fast to move from cash into the long-term allocation, and the rule for selling the stock you keep. Decided calmly, in advance, rather than in the week the money arrives.
At close
- Do nothing fast. The proceeds go into the reserve structure already built. There is no deadline on investing them.
- Diversify on a schedule, not a mood. If you keep stock, a written plan to sell it over time removes both the temptation to hold forever and the urge to dump it on the first bad day. For insiders, that plan may need to be a formal trading plan filed in advance.
The year after
- Pay the estimates. Re-read the estate plan now that the numbers are real. Revisit the policy once the money has stopped feeling new.
This is a checklist, not advice; your deal, your state and your stock will change the answers, and the tax and estate questions need your attorney and accountant in the room. We are usually the ones who get them there. If a liquidity event is on your horizon, the best time to start is before anyone else knows the date.
This material is for informational purposes only and is not a recommendation to buy or sell any security. All investing involves risk, including loss of principal.