A software engineer at one of the major AI companies wrote in this week. He joined three years ago, the company is heading toward what could be one of the largest IPOs in history, and if everything holds his position will be worth north of $15 million. He is 31, married, no kids yet. His friends at other firms that already had tender offers have all handled it differently and have very different opinions about how to think about it. His question: what should he do right now, before the IPO, and what can wait until after?
The honest answer is that the difference between starting planning early and waiting until after the lockup expires can be measured in seven figures of tax. Here is how we, your advisors, think about it.
Why IPOs Come in Waves
A lot of people think IPOs happen randomly. They don’t. They come in waves, and the waves correlate with appetite for risk in the broader market. When investors are flush and optimistic, companies can raise more per share. When the market turns risk-off, the IPO window slams shut. 2020 was dead until late in the year. 1999, 2014, and the current AI cycle have all been roaring.
We are in one of those moments right now. SpaceX, Anthropic, OpenAI, plus a long bench of mid-sized companies, are all moving toward liquidity. This wave is going to mint a meaningful number of new millionaires and a handful of new billionaires. If you are sitting on private shares, the worst thing you can do is wait for the lockup to lift before you start planning.
Step One Is Knowing What You Actually Own
Before any tax strategy makes sense, you need a complete inventory. RSUs that have vested. RSUs that have not. ISOs (incentive stock options). NSOs (non-qualified stock options). Direct equity. Each one is taxed differently, and each one creates different opportunities and traps.
ISOs are usually the piece that confuses people the most, because they look simple and behave anything but. So that is where the planning needs to start.
The ISO Trap: AMT Without Liquidity
Here is the scenario that catches people. You have an ISO with a strike price of a dollar, and the stock is now worth $100 a share. You exercise the option. Great, you now own the stock. You paid a dollar a share. You have not sold anything, so you have not received any cash. It feels like nothing taxable just happened.
The IRS sees it differently. Under the alternative minimum tax (AMT), that $99 spread between your strike price and the market value gets counted as income for AMT purposes. So you owe tax on a paper gain, with no liquidity to pay it. This is where people get crushed. They exercise, get hit with a large AMT bill, and then scramble to figure out where the cash is coming from.
The reason to exercise anyway, in many cases, is the long-term capital gains treatment. If you hold the shares for one year after exercise and two years after the grant date (the one-two rule), the entire spread qualifies for long-term capital gains instead of ordinary income. That can save you 15 to 20 percentage points of federal tax on the entire position. So exercising early, while the price is still close to your strike, can dramatically reduce both your AMT exposure and your eventual tax bill. But only if it is planned.
Concentration Plus Career Is the Real Risk
The other piece to flag early is concentration risk. After an IPO, you are likely to be sitting on a stock position that represents most of your net worth, in a company that also signs your paycheck. Your investment risk and your human capital risk are stacked on top of each other. That is a dangerous combination.
You do not have to sell everything the day after the lockup lifts. But you do need a plan for trimming the position over time, ideally tax-aware, so that a single bad quarter does not take out your portfolio and your job in the same week.
DAFs, Estate Work, and Building the Team
If you are charitably inclined, this is a moment to look hard at a donor-advised fund. A DAF lets you give appreciated stock, avoid capital gains on the gift, and take a deduction in a year when your taxable income is unusually high. Some employers will match charitable giving and direct it into a DAF in your name, which doubles the impact. If you know you are heading into a tax-heavy year, front-loading several years of giving into one DAF contribution can move the needle meaningfully.
The other thing to do now, not later, is build the team. A liquidity event of this size touches your financial plan, your estate plan, and your tax return for years. Your CPA, your estate attorney, and your advisor all need to be coordinating before the lockup ends, not scrambling after.
Start Now, Not on Lockup Day
The window for the cleanest planning is the window you have before the lockup lifts. That is when you can model AMT scenarios, start ISO holding clocks, build a diversification plan, and structure any charitable giving. Wait until after, and most of the best moves are off the table.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on pre-IPO planning for tech employees with concentrated equity, listen to the full podcast episode here.