Establishing a defensible fair market value prior to a liquidity event is crucial for tax basis planning, potential gifting strategies, and managing future capital gains. A professional valuation provides documentation that can withstand IRS scrutiny, forming the foundation for all subsequent planning. Other options are either premature, risky without a valuation, or a missed planning opportunity.

In a cashless exercise, a portion of the shares is immediately sold to cover the exercise price and taxes. The sale of those shares is a disqualifying disposition, generating ordinary income/W-2 wages for the bargain element. The shares the client retains have a cost basis equal to the exercise price plus any income reported, and their holding period begins the day after exercise.

A systematic selling plan upon vesting provides immediate liquidity, allows for diversification away from single-stock risk, and manages the tax liability since the ordinary income tax event (vesting) is unavoidable with RSUs. Selling immediately upon vesting doesn’t necessarily create an additional tax disadvantage, while holding concentrates risk. Section 83(b) elections are not available for RSUs, only for restricted stock.

The key theoretical advantage of ISOs is the potential for preferential tax treatment: if the statutory holding periods are met (2 years from grant, 1 year from exercise), the entire profit is taxed as long-term capital gain, and no ordinary income is recognized at exercise for regular tax purposes. However, the bargain element at exercise may trigger AMT. NSOs always have ordinary income at exercise.

RSAs provide immediate, tangible equity value (subject to vesting), which can be a powerful retention tool as the employee feels like an owner from the start. Options, while offering leverage, can become underwater and lose their retention value if the stock price falls below the exercise price. The “full-value” aspect of RSAs versus the “option” value is a core strategic distinction.

The AMT credit is generated when AMT paid is attributable to “deferral” items like ISO exercises. This credit can be carried forward indefinitely. It is used in future years when the taxpayer’s regular tax liability exceeds their tentative minimum tax liability. The credit offsets the regular tax down to the level of the AMT, effectively allowing the taxpayer to recoup the prior AMT paid.

A double-trigger acceleration provision is a common and shareholder-friendly design. Vesting accelerates only if BOTH a change-in-control (e.g., acquisition) occurs AND the employee is terminated without cause (or sometimes resigns for good reason) within a set window (e.g., 12-24 months) after the transaction. This protects the employee if the new acquirer lets them go, but doesn’t automatically reward employees who remain with the surviving company.

The defining characteristic of Performance Stock Units (PSUs) is that vesting is contingent on achieving specific performance metrics (e.g., stock price targets, EBITDA goals, relative TSR) over a performance period. RSUs vest solely based on time-based service conditions. Both RSUs and PSUs are generally taxed as ordinary income at vesting (when the shares are delivered and are no longer subject to a substantial risk of forfeiture).

To minimize current capital gains tax, selling shares with the highest cost basis results in the smallest taxable gain. Shares from RSUs have a basis equal to the fair market value at vesting (which is also the amount taxed as ordinary income), so they often have a higher basis than options exercised at a lower price. The specific identification method allows the taxpayer to choose which tax lots to sell, overriding FIFO, but requires proper instruction to the broker before settlement.

Establishing a defensible fair market value prior to a liquidity event is crucial for tax basis planning, potential gifting strategies, and managing future capital gains. A professional valuation provides documentation that can withstand IRS scrutiny, forming the foundation for all subsequent planning. Other options are either premature, risky without a valuation, or a missed planning opportunity.0