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From Startup through IPO or Acquisition.
Wealth planning before and after a liquidity event.
Prepared by:
In this white paper
Eric J. Smith,
Senior Wealth Planning
Strategist.
1
Overview
1
1
1
2
3
Wealth planning before a liquidity event
Developing your financial plan
How the IPO or acquisition structure can affect you
Risks in pre-IPO or pre-acquisition stock
Taxation of RSUs, restricted stock and stock options:
Income tax rules and incentives for growth company equity
Estate planning opportunities
Susan P. Rounds,
Senior Director of Planning.
4
5
5
6
7
7
Wealth planning after a liquidity event
Restrictions on selling, hedging or pledging your newly public stock
Charitable giving and planning opportunities
Qualified small business stock tax incentives
Monetizing, hedging and diversifying your concentrated position
of public stock
11 Conclusion
11 Appendix A
11 Financing phases of a typical emerging growth company
From Startup through IPO or Acquisition
Wealth planning before and after a liquidity event
Overview.
For founders, officers, employees and investors, an
initial public offering (IPO) or acquisition may be the
most important financial event in their lives and a
critical time to develop a financial plan to diversify or
preserve the wealth created through these events.
As the dotcom crash and recent IPOs remind us,
there is no guarantee that a company’s stock price will
go up after an IPO; it can drop dramatically, wiping out
some or all of those “paper” millions. Maximizing the
potential long-term financial rewards of a liquidity event
requires strategic financial planning before the event,
not just after.
This paper provides an overview of financial and
investment planning issues for equity stakeholders1
in early stage growth companies,2 commonly known as
startups. Many early stage private growth companies
are venture capital-backed3 startups in one of several
industries: software, life sciences, internet-specific
(e.g., social media), industrial/energy (including clean
technology), IT services, media and entertainment.4
While there is a new and growing secondary marketplace
for limited trading of private company shares for
qualified participants,5 typically startup founders,
employees and investors cannot monetize their holdings
until the company has a liquidity event, either through
an IPO or an acquisition by another company.6 Although
IPOs get most of the media attention, the vast majority
of growth companies reach a liquidity event through a
merger or an acquisition.7
Wealth planning before a liquidity event.
Developing your financial plan.
During the dotcom boom and bust in the late 1990s and
early 2000s, countless startup founders, employees and
investors lost paper fortunes by failing to implement
financial plans to sell and diversify before their stock
lost value or became worthless. Some even had to file
for bankruptcy as a result of making poor tax decisions.8
Financial planning is an important step in helping to
grow, protect and transition your wealth.
Managing your stock, restricted stock units (RSUs) or
options starts with identifying your personal financial
goals and issues. These may include long-term cash
flow needs, retirement security, income taxes,
investment strategy and estate planning. It’s also
important to take into account legal and company
policy restrictions on selling your stock. Developing
an integrated plan can help provide a road map for the
many tax and investment decisions you will need to
make before, during and after a liquidity event.
The advisory team approach to planning.
An equity stakeholder should have a team of
professionals—including a tax accountant,
financial advisor or planner, investment
strategist, trust and estate attorney—working in
coordination with their corporate legal counsel to
help plan for liquidity events and longer term
financial needs. Ideally one of these advisors
(often a financial advisor or financial planner)
will act as a quarterback to coordinate the various
team players that will develop and implement the
financial plan. This coordinated team approach
can help reduce the time spent by the equity
stakeholder and help maximize the potential
for a successful outcome.
Remember: Because time-sensitive tax and investment
decisions are important factors in determining whether
or when you reach your financial goals, it is important
to consider planning well before the liquidity event to try
to mitigate mistakes. During and after the liquidity
event, you can update and refine the planning.
How the IPO or acquisition structure can affect you.
Understanding the capital structure of your growth
company and the potential outcomes in an IPO or
acquisition is essential in developing your financial plan.
Growth companies structured as C corporations issue
common stock (or options or RSUs for common stock)
to founders and employees, while preferred stock is
issued to cash investors like venture capitalists (VCs)
and angel investors.9 Prior to an IPO or acquisition,
most growth companies raise equity capital in rounds.
From Startup through IPO or Acquisition
1
Each round raises enough money to fund the company
through its next major developmental, operational or
financial milestone, and then it raises its next round but
at a higher valuation. The final financing phase for most
growth companies—and liquidity event for existing
stockholders—is to be acquired by a public company or
undertake an IPO. (See Appendix A for more detail on
the financing phases of a typical growth company.)
IPO structure. An IPO involves a new offering and
issuance of common stock by the company. Preferred
stock normally converts into common stock immediately
prior to the IPO. The IPO process involves a team
of professionals including underwriters, attorneys,
accountants and company management, and can
take anywhere from four months to over a year.10
The number of shares to be offered in an IPO is
determined by several factors, including creating a
large enough float (the total number of shares publicly
owned and available for trading) to provide liquidity
for the stock to trade after the IPO. The final per share
price11 is determined by the company’s valuation12
divided by the number of shares outstanding after
the IPO, after giving effect to any forward or reverse
stock splits advised by the managing underwriters to
achieve an appropriate initial per share price for
marketing purposes.13
Selling stockholder participation. Some existing
stockholders may also be allowed or requested to sell
shares in an IPO. If the company does not need to raise
a large amount of capital, stockholder participation will
be important to increase the public float and investor
liquidity. Allowing existing stockholders (especially
those with large positions) to sell in the IPO also
reduces the market overhang (existing, privately held
shares which can be sold in the future), minimizing the
risk that large blocks of stock may flood into the market
and depress the stock price. However, while a growth
company typically has contractual obligations to
register shares of VCs to be included in the IPO,
significant sales by insiders in the IPO can spook the
markets by creating a perception that insiders are
‘‘bailing out.’’ The amount of selling stockholder
participation is made in consultation with the managing
underwriters in light of these factors. Most employees
are typically only allowed to sell a small amount, if any,
in the IPO and must instead wait until their lock-up
expires14 (typically 180 days, but can be extended or
reduced, in some cases) to begin selling, subject to
company or legal restrictions.
2
From Startup through IPO or Acquisition
Merger or acquisition structure. A merger or acquisition
is typically structured as all stock, all cash or a
combination of stock and cash transaction. But other
key terms also come into play, including how much is
paid up-font, how much is held back or subject to an
earn out, the time period over which it is paid, the
treatment of stock options and RSUs, etc. Also,
treatment of individual founders and employees may
vary dramatically depending on the value the acquirer
places on retaining each specific person.
Unlike IPOs, acquisitions often happen without much
or any advance notice to employees. And what
employees receive in the sale is completely dependent
on the terms of the negotiated merger or acquisition
agreement. Common stockholders are often surprised
and disappointed to learn for the first time that because
of the liquidation preferences of preferred stock they
will receive little or in some cases nothing upon the
sale of the company.
Risks in pre-IPO or pre-acquisition stock.
Being aware of some basic risks to your pre-IPO or
pre-acquisition stock is critical in planning for what you
might ultimately receive, if anything, in a liquidity event.
Stock splits. Many people analyzing the equity
component of an employment offer from a pre-IPO
startup mistakenly think that a large number of shares
equates to a lot of value. But the number of shares
outstanding in a private company is arbitrary and many
companies implement a stock split prior to an IPO to
set a per-share price that is within a range preferred by
the public market place.
Remember: Focus on the percentage of company
ownership represented by your shares (or options or
RSUs), and not the number of shares, to help estimate
the potential value of your options, RSUs or stock.
Dilution. Another factor to be aware of is the dilutive
impact of future issuances of stock and options to
employees and investors. For example, if an early stage
hire is granted restricted stock or options representing
five percent of the company, subsequent issuances to
employees and investors have the potential to
dramatically reduce that percentage by the time of the
liquidity event. Potential dilution is very specific to each
growth company, and largely depends on how much
capital will need to be raised and how many additional
employees will need to be hired after an early stage
hire’s grant of equity before a liquidity event.
Remember: Be aware that your percentage of company
ownership may decrease (be diluted) as more stock is
issued to investors and employees after an initial grant
of shares, options or RSUs.
Preferred stock liquidation preferences. VCs and other
cash investors buy convertible preferred stock when
they invest in a private startup. The preferred stock has
a liquidation preference which means VCs have a choice
when the company is sold: either they can take the sale
proceeds (cash and/or stock) “off the top” and get their
investment back (often with a specified additional
return), or they can convert to common stock and get
what the common stockholders get for each share. Since
the 2001 tech crash, VCs are also more commonly
utilizing two variations to convertible preferred stock.
One is a participating convertible preferred stock, which
allows the VCs to get their money back (sometimes
with an additional return) first and then convert their
preferred stock to common stock and share in what is
left, if anything. The other method is a multiple
liquidation preference which gives VCs an opportunity
to get two, three, four, or five times their investment
back before common stockholders get any proceeds
from a sale of the company.
Immediately prior to the acquisition, preferred
stockholders may decide whether or not to convert to
common stock based on which route pays more. If the
company is acquired for a price that is less than what
preferred stockholders have invested (plus any additional
return baked into the liquidation preference), the
preferred stock will not be converted to common stock
and the common stockholders may receive substantially
less or nothing at all. Note: In most IPOs, all preferred
stock is converted to common stock right before the
IPO, rendering the liquidation preference irrelevant.
Remember: Review the details of the preferred stock
liquidation preferences and how many shares are
outstanding in order to estimate how those liquidation
preferences may impact what you ultimately receive
for your common stock in a hypothetical merger
or acquisition.
Vesting restrictions and acceleration triggers. Vesting
restrictions are usually imposed on all grants of restricted
stock, RSUs or options. If an employee’s service is
terminated for any reason before the option fully vests
(typically over four years), the unvested portion is
forfeited. Founders and senior executives commonly
negotiate accelerated vesting on a sale of the company,
but such provisions do not typically exist in a company’s
equity incentive plan, which is set for the benefit of all
workers and not commonly negotiable by individual
employees. Single trigger acceleration means the
unvested stock or options vest (partially or wholly)
ahead of schedule if the company is acquired. Double
trigger acceleration means that vesting is accelerated
only if the employee is terminated (or materially
demoted) without cause after the acquisition. If your
stock options do not have these provisions, you must
remain an employee of the acquiring company for the
remainder of the vesting period to receive the full
benefit of the option grant. In rare cases, the equity
incentive plan may even provide that unvested options
are canceled upon an acquisition.
Remember: To help plan accordingly, determine whether
or not your RSUs, options or restricted stock have
accelerated vesting in connection with an acquisition.
Taxation of RSUs, restricted stock and stock
options: Income tax rules and incentives for
growth company equity.
In developing your financial plan you should be
aware of basic taxation rules for restricted stock,
RSUs and options.
RSUs. RSUs are not taxable until they vest, at which
time the entire value of the vested stock is taxed as
ordinary income. Most RSU plans allow or require the
company to automatically sell enough shares on the
vesting date to cover withholding tax and withhold that
amount. The value of all the RSUs which vest during
the year are reported on the employee’s W-2. The only
choice after vesting is whether to sell the vested stock
immediately—in which case no extra tax is due—or hold
the stock and sell it later. If the stock is held for at least
one year after it vests, any gain on sale is taxed as
long-term capital gains. The key decision is whether to
hold the stock for at least a year in order to pay the
lower capital gains rate. This vest and hold strategy
must be weighed against the risk of holding a single
company stock and failing to diversify investments.
Restricted stock. Restricted stock15 normally vests over
time (four years is common) provided the holder remains
an employee or service provider. The tax code provides
a choice on how restricted stock is taxed. The employee
or service provider can choose to file an 83(b) election
within 30 days of receipt of the unvested stock and pay
ordinary income tax based on the value of the common
stock on that date less the amount paid for it.16 The
From Startup through IPO or Acquisition
3
83(b) election starts the capital gains holding period.
If the holder chooses not to file an 83(b) election, he or
she recognizes taxable ordinary income each date any
stock vests based on the value of the stock on that
vesting date, less any amount paid for the stock.
Non-Qualified Stock Options (NQSOs). NQSOs
are not taxed at the time they’re granted but when
they are exercised. The spread—the value of the stock
at exercise less exercise price—is taxed as ordinary
income. If the stock received on exercise is then held
for at least a year, any appreciation after the exercise
date is taxed as long-term capital gains. The potential
tax savings of exercising and holding NQSOs need
to be weighed against the added exposure to the
unnecessary and otherwise uncompensated risk of
holding a concentrated stock position.
Incentive Stock Options (ISOs). An ISO is neither
taxed at grant nor at exercise; however, the spread is an
alternative minimum tax (AMT) preference item which
can trigger AMT. Except for potential AMT, if the stock
received on exercise is sold at least two years after the
option grant and one year after exercise, the entire gain
will be taxed as long-term capital gains. Consult with
your accountant regarding any potential AMT impact
before exercising an ISO. If you exercise the ISO and
sell the stock immediately (also known as a disqualifying
disposition), all gain (the spread) is taxable as ordinary
income. The potential tax savings of exercising and
holding ISOs needs to be weighed against the AMT
impact and, like NQSOs, the added exposure to the
unnecessary and otherwise uncompensated risk of
holding a concentrated stock position.
Planning alert: After the IPO, if your RSUs or
options represent a significant portion of
your wealth and you are not yet financially
independent, you may consider the benefits of
exercising and selling these holdings as they
vest and investing the proceeds in a diversified
portfolio. If you are financially independent (i.e.,
already have enough wealth to support all your
basic needs without working), you may consider
being more aggressive in taking the risk of
holding a more concentrated position.
Note: Charitable giving and qualified small business
stock tax incentives are discussed on page 6 and
page 7, respectively.
4
From Startup through IPO or Acquisition
Estate planning opportunities.
Alert: New estate planning opportunities.
The American Taxpayer Relief Act of 2012 (ATRA)
was signed into law on January 2, 2013, making
significant changes to taxes on estates, gifts, and
generation-skipping transfers (GST). Under ATRA,
the top estate, gift, and GST tax rates have been
increased to 40 percent. The unified estate and gift
tax exemption and the GST tax exemption are now
permanently set at $5 million, adjusted annually for
inflation. The inflation-adjusted amount for 2013 is
$5.25 million and $5.34 million for 2014. Portability
of the estate and gift tax exemption between spouses
has been made a permanent part of the tax law as
well. Generally under the portability provision, a
surviving spouse can utilize a pre-deceased spouse’s
unused exemption by applying the unused portion
to transfers made by the surviving spouse during
life or at death. Portability does not apply to GST.
In addition, recent annual General Explanations of
the Administration’s Revenue Proposals (also known
as the Greenbook), if enacted into law, would curtail
or eliminate several common estate planning
strategies, including Intentionally Defective Grantor
Trusts (IDGTs), dynasty trusts, and short-term,
zeroed out Grantor Retained Annuity Trusts (GRATs),
all discussed below.
Remember: You may want to consider taking
advantage of the current large gift tax exemption,
relatively low gift tax rates, and certain wealth
transfer strategies before tax laws change again.
Benefit of gifting before the IPO or acquisition. Gifting
vested stock or options before an IPO or acquisition,
when the value is low compared to the potential IPO or
acquisition value, can help to potentially increase your
and your family’s long-term wealth, perhaps for multiple
generations. An illustration helps make this clear:
John Doe owns stock of ABC, Inc., a pre-IPO company,
which is presently valued (by a professional appraiser)
at $2 per share. In 2013, John makes a taxable gift of
5,000,000 shares of ABC stock to an irrevocable trust
established for the benefit of his three children. He elects
to use $10 million of his and his wife’s $10.5 million
lifetime estate and gift tax exemption for this gift;
thus, he will pay no gift tax.
In 2015, ABC, Inc. completes an IPO which values the
stock at $10 per share, meaning the 5,000,000 shares
transferred to the trust are now worth $50 million. In
other words, $50 million of value has been transferred
free of estate and gift tax. In contrast, if John waited
to gift the stock until after the IPO, he would have to
pay $15.8 million in gift tax!17
Restrictions on selling, hedging or
pledging your newly public stock.
Note: The value of any stock to be gifted should be
determined by a professional appraiser.
Lock-up agreements. Once your stock has gone through
the IPO process or you receive stock in a merger or
acquisition, your stock will normally be subject to a
“lockup period” and you won’t be able to put it on the
market until the lockup expires. As mentioned in the
selling stockholder participation section on page 2,
underwriters will consider various factors to ensure
that shares owned pre-IPO by company stakeholders
don’t enter the public market too soon after the IPO—
ostensibly to prevent an oversupply of shares from
flooding the market. In an acquisition, the acquiring
company may require that the acquiring company stock
you receive in the deal be subject to a lock up for a
period of time to avoid a large amount of shares hitting
the market all at once.
Intentionally Defective Grantor Trust (IDGT). The
potential benefit of gifting early can be supercharged
by making the gift to a specific type of irrevocable
trust known as an IDGT. An IDGT is designed to be
complete for gift and estate tax purposes,18 but
“defective” for income tax purposes. This means that
assets held by the trust are excluded from your estate
for estate tax purposes, but taxed to you during life for
income tax purposes. When you pay the income tax due
on assets in an IDGT, you further reduce your taxable
estate (without it being considered a taxable gift)19 and
allow the assets in the trust to grow tax free.
Dynasty trust. Your irrevocable gift trust can also be
established in a jurisdiction like South Dakota or Delaware
that permits a dynasty or legacy trust.20 A dynasty
trust can be designed to help mitigate gift, estate and
generation-skipping trust taxes, and provide benefits
for multiple generations. If structured properly, income
which accumulates in a dynasty trust may also help
avoid state income taxation, which can be substantial in
a state like California.
Grantor Retained Annuity Trusts (GRAT). Another
common strategy to transfer pre-IPO or pre-acquisition
stock to children or other beneficiaries is to use a GRAT.
GRATs are also effective for post-IPO stock before it is
sold and the proceeds are diversified. See page 10
for a discussion of GRATs.
Charitable giving and planning opportunities. See page
6 for a discussion of tax-related charitable planning.
Wealth planning after a liquidity event.
In order to sell, hedge or pledge your newly public
company stock, you typically need to navigate a series
of contractual, legal, regulatory and company policy
restrictions. The tax impact of various decisions is also
an important part of your financial plan. In this part we
start with an overview of restrictions on selling, hedging
or pledging public company stock. We next discuss
income tax planning opportunities and finally provide
an overview of strategies for monetizing, hedging and
diversifying your concentrated stock position. As
always, rely on your financial, tax and legal advisors to
help explain these restrictions, any corporate policies,
tax rules and strategies for monetizing stock.
The terms of lockup agreements may vary, but most
lockup agreements in an IPO prevent insiders from
selling their shares for 180 days. Lockups may also limit
the number of shares that can be sold over a designated
period of time. U.S. securities laws require a company
using a lockup to disclose the terms in its registration
documents, including its prospectus. Once the lockup
period expires, you may be in a position to consider the
strategies discussed below, subject to securities laws and
company policies. When approximating the right time to
enter the market, factor in the theory that a company’s
stock price may drop in anticipation that locked up shares
will be sold into the market when the lockup period ends.
Corporate policies on insider trading, hedging, pledging
and stock retention. Most issuers have formal policies to
help safeguard against illegal insider trading, along with
restrictions against hedging and margin loan (pledging)
transactions by executives. These policies typically
designate blackout periods (when executives are
prohibited from conducting company stock transactions)
which usually relate to the end of a quarterly reporting
period and continue for a specified period of days after
the company announces financial results.
Planning alert: Company insiders can help avoid
insider trading problems by understanding and
complying with company insider trading policies,
including blackout provisions and preclearance
trading rules. This often will include getting
advance approval from a designated company
officer or counsel before buying or selling company
shares and/or adopting a stock trading program.
A brief overview of some common securities law
restrictions follows on the next page.
From Startup through IPO or Acquisition
5
Securities laws and regulations.
Charitable giving and planning opportunities.
Reporting on Forms 3, 4 and 5 for corporate insiders.
The Securities Exchange Act of 1934 requires officers,
directors and beneficial owners who hold more than
10 percent of a company stock (also defined as
“reporting persons” or “insiders”) to file an initial
statement of holdings with the U.S. Securities and
Exchange Commission (SEC), disclosing their beneficial
ownership in the company stock. Also, insiders must
report changes in ownership, including hedging
arrangements or the purchase/sale of a security-based
swap agreement involving such equity security, within
two business days of such change. Additionally, within
45 days after the end of the company’s fiscal year,
insiders must also report any transactions that should
have been reported earlier or were eligible for deferred
reporting. See the SEC’s website for more information
on Forms 3, 4 and 5.21
Americans are the most charitable people in the world.24
The U.S. federal tax laws have provided incentives for
charitable and philanthropic activities and giving
since 1913. The tax benefit of a charitable contribution
hinges on:
Short swing profits rule. Insiders who realize any profit
from the purchase and sale (or sale and purchase) of any
company shares within any period less than six months
generally must return all profits associated with the
transaction to the company. This “short-swing profit”
rule is highly technical and can apply to transactions
made by family members and to trusts set up for their
benefit.22 However, most acquisitions of company stock
through company benefit and compensation plans are
exempt transactions, and will not be considered
matchable for purposes of this rule.
Insider trading. Illegal insider trading refers generally
to buying or selling stock while in possession of
material, non-public information about the stock or
company. Insider trading violations can also include
“tipping” such information, trading of the stock by
the person “tipped” and trading by persons who
misappropriate such information. The penalties for
insider trading can be severe—just ask Martha Stewart
or Rajat Gupta. Because of the serious consequences of
illegal insider trading, most issuers have policies in
place to prevent it.
Rule 144. Rule 144 imposes restrictions on the resale of
stock not registered with the SEC (known as restricted
securities) and also to the sale of registered stock by
insiders and affiliates of the company. There are holding
period, volume limitation, manner of sale and other
requirements for a Rule 144 sale. Contact your corporate
counsel for more details. For educational purposes only,
the SEC’s website has a summary explanation of Rule
144 sale requirements.23
6
From Startup through IPO or Acquisition
n
Whether the donation is made to a public charity
(including a donor advised fund) or a private
foundation,
n
What property is gifted to the charity, and
n
Whether the gift is direct (the simplest) or made
through a split interest vehicle, such as a charitable
remainder trust (CRT), charitable lead trust (CLT)
or a gift annuity.
The tax benefits are generally greatest for donors who
make contributions after an IPO or acquisition when
they own stock with a high market value but a low cost
basis. The donor may receive an income deduction for
the full value of the post-IPO stock without being
required to pay tax on the appreciation.
Public charities/Donor Advised Funds vs. Private
foundations. A donor making gifts of cash to a donor
advised fund or public charities may deduct up to 50
percent of his or her adjusted gross income (AGI). In
contrast, gifts of cash to most private foundations will
allow a donor to deduct only up to 30 percent of his or
her AGI. In either case, contributions in excess of the
maximum deductible amount may be carried forward
and deducted for up to five years, subject to the same
percentage limitations each year.
Planning alert: Consider pre-funding your lifetime
giving by making one large, tax-deductible
charitable donation to a donor advised fund or
private foundation in the year of the IPO or
liquidity event when your AGI may be exceptionally
high. That large donation can then be distributed
to charities by the donor advised fund or private
foundation over many years. When contributing
stock to charities (or donor advised funds or
private foundations) for a year-end tax deduction,
start the process earlier than usual as this will
take longer to coordinate than cash donations.
If you are contributing closely held or otherwise
restricted securities (for example, you are an
affiliate for Rule 144 purposes), be sure to take
all the necessary steps to obtain approval for the
transfer prior to making the contribution.
Donating stock. The potential tax savings increase
significantly when you gift long-term capital gains
property, such as publicly traded stock held for more
than one year, to a public charity. Such a contribution is
deductible up to the full amount of the stock’s fair
market value. But the deduction is subject to a reduced
ceiling of 30 percent of the donor’s AGI. Also, if the gift
is made to a private foundation, the deduction is limited
to 20 percent of AGI. Private, pre-IPO stock contributed
to a public charity or private foundation generates a
deduction that may be limited to the donor’s cost basis.
Qualified small business stock tax incentives.
Certain small business corporation tax incentives allow
you to avoid or defer tax without having to make a
charitable contribution, if you qualify. According to
Forbes magazine, after Marc Andreessen sold his first
venture, Netscape, to AOL, he sold $5.7 million of
AOL stock to finance his next venture but “didn’t pay
a penny in capital gains taxes.”25 You might be able to
do the same thing if you own qualified small business
(QSB) stock.
Section 1045: Rollover of gain on sale of QSB stock.
Section 1045 allows the tax-deferred rollover of gain
from the sale of stock of one qualified small business
corporation into stock of another qualified small business
corporation. A qualified small business is one that has
assets below $50 million immediately before and after
you acquire your stock and is an active business that
is not in certain ineligible lines of work.26 This tax
incentive is a powerful strategy for serial entrepreneurs
and startup investors.
To qualify for Section 1045, you must acquire your
stock directly from the corporation, not from another
investor.27 There’s no limit to how long you hold your
QSB stock, how big the company can grow, the amount
you can roll over or how many times you can do a
rollover. But you must hold each stock for at least six
months and make your new QSB stock investment
within 60 days of selling off the old one. Your original
basis is carried over into the new investment.
Planning alert: Serial entrepreneurs and angel
investors who can line up new investment
opportunities to meet the 60-day deadline are
best able to take advantage of Section 1045.
Section 1202: Exclusion of gain on sale of QSB stock.
In 2009, 2010, and 2013, Section 1202 was amended
to allow investors to completely eliminate (rather than
just defer) 100 percent of the tax on gains from the
sale of QSB stock if it was originally acquired between
September 27, 2010 and the end of 2013, and it is held
for at least five years before being sold. For stock
acquired after 2013, Section 1202 reverts to its original
form which provides that gain (subject to ceilings) will
be taxed at 14 percent, but some of the gain is included
for AMT purposes.28
Section 1244: Losses on small business stock. If your
QSB shares satisfy the requirements of IRC Section
1244 as small business stock, married couples filing
jointly may be able to treat capital loss (up to $100,000
each year) as an ordinary loss.29 If you have losses in
excess of the $100,000 ($50,000 for individual filers)
for the year, the excess is a capital loss. The loss on the
stock can stem from a sale, a company’s liquidation, or if
the shares become worthless.
Monetizing, hedging and diversifying your
concentrated position of public stock.
Subject to the above restrictions, equity holders should
consider the benefits of liquidating concentrated stock
positions and diversify if the stock represents a
significant portion of their overall net worth, particularly
if they are not yet financially independent. Even if after
the IPO or acquisition your primary objective is to hold
the stock, having an understanding of your options to
manage risk and create liquidity when needed can be
helpful as you manage your investments in the long
term. Some potential options for consideration are
discussed below:
Liquidation and reposition. The primary objective of
managing a concentrated position is to minimize
downside risk. But there is a dilemma: the risk of
holding vs. the tax cost of selling. IPO stock may have a
low cost basis, which translates to a higher gain on sale.
The current long-term capital gains rate is 20 percent
for stock that has been held for 12 months or longer.
Short-term capital gains are taxed at ordinary income
tax rates. The top income tax rate is currently 39.6
percent. Additionally, a 3.8 percent Medicare surtax is
now levied on net investment income. The combined
result of the federal income tax and Medicare surtax
is a 43.4 percent tax on short-term capital gains and a
23.8 percent tax on long-term capital gains.
From Startup through IPO or Acquisition
7
While a concentrated position may be sold all at once
affording the means to diversify immediately, gradual
sales over a period of time may be a good alternative by
creating the opportunity to reinvest proceeds over a
longer period of time, allowing you to adjust your
diversification strategy as you go. Sales can be staged
at designated times, such as mid-month or quarterly,
at pre-set share prices and amounts or as indicated
by the market.
This technique positions potential gains and any
resulting tax to be spread over a number of years.
Capital gains in any one tax year can be offset by
unused capital losses carried forward from previous tax
years, as well as by any capital losses realized in the
year of sale. If you are considering a sale of a portion, or
all, of your concentrated position at a gain, it may be a
good time to evaluate, with your investment
professionals, a potential sale of loss-producing
investments within your portfolio that you no longer
wish to hold. The losses triggered can be used to offset
the gain on sale of the concentrated position and the
portfolio can be rebalanced with the liquidity created.
10b5-1 plans. Corporate insiders have particular
challenges with regard to diversifying concentrated
positions in company stock. These individuals are
generally presumed to have access to material,
non-public information and are prohibited from trading
when they are in possession of such information. Rule
10b5-1 plans are written plans for pre-planned trading
used to provide a defense to any alleged insider trading
by allowing an insider to demonstrate that inside
information was not a factor in the decision to trade in
qualified transactions effected in accordance with the
plan. An insider might structure a 10b5-1 plan to sell a
certain number of shares, or a percentage of shares at
specified time intervals, but the plans can be further
customized from the outset to meet varying objectives.
Once the prearranged plan is put in place, it is
essentially on autopilot. There are limitations in
modifying or abandoning any plan once it’s established
and such actions may jeopardize the defense offered
pursuant to rule 10b5-1. Insiders should refrain from
entering other transactions with respect to the company
stock once the plan is in place and seek guidance from
their corporate counsel if they would like to modify their
plans. Limiting the duration of the plan may afford
some flexibility.
8
From Startup through IPO or Acquisition
Managing the risk of retention.
Outright sales may indeed meet your portfolio
objectives, but other more sophisticated techniques may
allow you to hold your hot stock, while you turn down
the heat too. There are strategies that will allow you to
monetize (provide liquidity), hedge and diversify your
risks. Hedging is used to moderate the impact of a
concentrated position’s volatility and incorporates
derivatives utilizing such strategies as puts, calls and
collars. A derivative itself is a contract between two or
more parties. The value of a derivative is determined
by fluctuations in the underlying asset, in this case
the stock included in your concentrated position.
Diversification allows an investor broader market
participation without forcing liquidation of a
concentrated position. Diversification strategies include
margin loans, exchange funds, derivative strategies such
as variable prepaid forwards, and hedging strategies
combined with loans. Additional techniques that may
help you reach your goals are outlined as well.
Many companies have restrictions in their trading
policies preventing certain individuals, such as corporate
insiders and executives, from entering into derivatives
contracts. Thus, many executives will be precluded from
hedging or pledging by utilizing strategies such as puts,
calls and collars. Always consult with your compliance
officer or corporate counsel for your company on your
company’s trading policies.
Protective put option. A put is a type of option contract
that grants the put buyer, or holder, the right to sell a
specific number of shares at a fixed price (the strike
price) by a set date. For the price of the put, the buyer
obtains protection against a drop in the stock price
below the strike price of the put. The put seller, or writer,
is obligated to purchase the shares at the strike price
regardless of the current market price. The put holder
retains full exposure to future price appreciation. If the
stock price is increasing, the put holder simply declines
to exercise the option. Unless the option is exercised,
the put holder keeps the shares, along with the voting
and dividend rights.30 Note that if the stock position is
retained, there is no diversification of the portfolio.
Covered call. By selling a covered call on currently
owned shares, an investor grants the call buyer the right,
but not the obligation, to buy shares of a stock at an
established strike price by an agreed upon date in
exchange for an upfront option premium. The call writer
maintains upside appreciation to the call strike price,
but foregoes all participation in the share price beyond
the option strike price during the life of the option.
Option premium received through covered call writing
can soften an investor’s downside risk but does not
protect against the risk of significant loss of share value.
Covered call positions can be settled by delivery of cash,
or may be structured to allow for diversification of
shares at predetermined prices, as shares may be subject
to assignment when the market price of the shares
exceeds the option strike price.
Collar. The sale of a covered call in combination with
the purchase of a protective put option is known as a
collar. By using a collar, an investor retains the right to
limit downside loss to a predetermined value (the put
strike or “floor”) and agrees to limit upside participation
on the upside (the call strike or “ceiling”). When the
dollar value of premiums of the call and put options
equally offset, this is known as a “cashless (zero-cost)
collar.” Collar strike prices may be selected in
accordance with the amount of risk reduction and
upside participation desired by the investor, and the
upfront strategy cost preference. As with call or put
options, collars can be settled on a cash basis prior to
any notice of assignment.
Besides the limit on upside potential, there are some
drawbacks from an income tax perspective. As long as
there is loss protection under the outstanding put, the
holding period requirements for qualified dividend
treatment may not be met.31 Further, the tax straddle
rules require that any gains be recognized immediately,
while any losses are deferred until the stock is actually
sold. By using protective puts separately or with a collar,
any dividends received while hedged are taxed as
ordinary income and the preferential taxation of
dividends at the 20 percent rate is disallowed.
Variable prepaid forward contract. The variable
prepaid forward is a combination of a cashless collar
and a secured loan. Under this strategy, the investor
enters into an agreement to sell a varying number of
shares at a future date in exchange for a cash loan now.
The transaction begins when the investor enters into a
cashless collar with a brokerage firm. The broker then
pre-funds the future, or forward, sale of shares by paying
a significant portion of the stock’s current value.
Settlement at expiration of the contract occurs by
delivery of some or all of the stock based on the value of
the shares on the delivery date, or cash or other securities
equal to the value of the shares to be delivered.
For example, assume you own 50,000 shares of XYZ
stock which is trading at $100 per share. You have a
liquidity need, but you are bullish on the stock and want
to retain it. In addition, you have low basis in the stock
and the tax impact of a sale concerns you. You enter into
a variable prepaid forward contract which provides a
floor at 90 percent of the current market price ($90/
share) for three years. In exchange for the floor, you sell
a call option at 130 percent of the current market price
($130/share). You receive 80 percent of the current
market value in cash up front. At the end of the threeyear term, the number of shares to be delivered at
expiration will be based on the stock price at maturity.
If the stock is below the floor at maturity, you will
deliver all of the shares to settle the obligation. If the
stock is above the floor at maturity, you will retain a
percentage of the shares. Hence, there is protection on
the downside, yet participation in some upside
appreciation. The cash received upfront can be used
for any purpose, including diversification. The strategy
may allow retention of voting rights and dividends, and,
if structured properly, tax deferral may be allowed.32
Note that an investor must have at least $5 million in
total assets and $3 million of liquid assets to enter a
variable prepaid forward contract. Tax straddle rules
may apply and this strategy can be difficult to unwind
prior to the expiration.
Exchange fund. An exchange fund is a partnership
wherein a group of investors each contribute their
own securities and in return each partner receives an
interest in a partnership holding a managed diversified
portfolio. Investors’ shares must stay in the fund for
seven years.33 In exchange for giving up returns on the
individual securities contributed, investors are able to
participate in the potential return of a pool of securities.
The contribution can consist of a concentrated
position, resulting in immediate diversification. The
contribution is not treated as a sale for tax purposes,
so tax is deferred until expiration of the seven-year
term.34 Because the investor’s basis in the new fund is
equivalent to the basis in the contributed stock, the
greater the unrealized capital gains in the stock being
exchanged, the greater the benefit of this technique.
Lack of control and lack of marketability discounts35
may be applied to the value of the partnership interests,
providing estate planning benefits.
From Startup through IPO or Acquisition
9
On the downside, this strategy is illiquid due to the
seven year tie-up and may provide little to no current
income. There is no guarantee of investment
performance and investors have no control over the
assets contributed. Investors must pay a percentage of
the value of their contribution as a placement fee, and
such funds have ongoing expenses that are much higher
than most mutual funds. Upon expiration of the fund
term, investors receive a pro-rata share of the diversified
holdings, so the nature of the original investment and
its total upside will be foregone (of course, the downside
risk is mitigated as a result). Ignoring placement fees, in
the end, you “win” if the stock you contribute performs
worse than the average of all the stocks held by the
exchange fund. Not all shares are eligible for
contribution to the fund.
Proxy hedge. When certain investors (insiders, board
members, executives) are unable to sell their positions
due to Rule 144 restrictions, contractual prohibitions or
other impediments such as company policy, a synthetic
proxy hedge strategy may be considered. A synthetic
hedge involves a marketable asset or basket of marketable
assets that are closely correlated to the restricted stock
such that the hedge mirrors the behavior of the
restricted stock. Typically, the correlated assets are
either sold short or the investor purchases put options
on them. The underlying asset included in the proxy
hedge is generally similar to the concentrated position
to be protected. A classic example involves an insider in
a particular industry, such as automotive, purchasing
puts on Honda while employed by Toyota.
Charitable Remainder Trust (CRT). A CRT is another
consideration for implementing a hedging strategy
for a concentrated stock position. Basically, a CRT is
a gift plan defined by federal tax law that allows a
donor to retain an income stream or direct it to other
non-charitable beneficiaries. When appreciated stock
contributed to a CRT is sold, any capital gains will avoid
recognition for income tax purposes. Post sale, the
trustee reinvests the gross proceeds and pays an income
stream to the donor or named income beneficiaries.
This effectively provides diversification for the donor
without triggering a capital gains tax. Thus, the income
stream is based on the full value received for the stock
without reduction for taxes. This income stream may
continue for the lifetime of named beneficiaries, a fixed
term of not more than 20 years or a combination of the
two, and may either be a fixed dollar amount or a fixed
10
From Startup through IPO or Acquisition
percentage based on the current value of the trust. The
donor may be eligible for income, estate and gift tax
deductions. Note that income and capital gains taxes
will be recognized by trust beneficiaries as distributions
are received from the trust.
There are some drawbacks to this strategy in that the
property transferred to the trust is inaccessible and only
the income stream, not the original assets, will return to
the beneficiaries. In addition, private foundation rules
will apply for tax purposes, and a professional valuation
of the trust may be required annually. However, if the
investor is charitably inclined, this strategy can provide
added value by helping to meet legacy goals.
Concentrated GRAT. Transferring your concentrated
position to a GRAT can provide some benefits for estate
planning purposes. A GRAT is a tax-advantaged wealth
transfer technique wherein an individual transfers
property that is expected to appreciate into an
irrevocable trust in exchange for a series of payments
based on the life of the trust and an interest rate set by
the IRS. The grantor “wins” if the property appreciates
above the IRS imposed hurdle rate because the
appreciated property passes to the named trust
beneficiaries with no additional transfer (estate or gift)
tax cost. Because the stock is now out of the grantor’s
estate, the appreciation escapes tax there as well. If the
property does not appreciate, the trust will ultimately
return all the property to the grantor. If this happens,
the transfer tax advantage is lost, but the real downside
consists of only the costs incurred to establish the trust
and any gift tax paid or lifetime exemption applied on
the initial transfer of the stock. If the GRAT was
zeroed-out by structuring the payments so that no
assets are expected to be left for the beneficiaries, no
gift tax will have been triggered.
The trust term must be set with mortality risk in mind.
If the grantor dies during the trust term, the assets will
be included in the grantor’s estate for estate tax
purposes. Obviously, a shorter term is less risky here.
A series of rolling two-year zeroed-out GRATs results in
a strategy targeted to take advantage of the generally
higher volatility in the short term, which may lead to
higher appreciation being transferred out of the estate.36
Be mindful that the risk of concentration is not mitigated
by holding stock in a GRAT; the goal is to move any
increase in value out of your estate for the benefit of
your named beneficiaries.
Conclusion.
The IPO or acquisition of your company may be the most
important financial event in your life. But maximizing
the potential long-term financial rewards of the liquidity
event requires strategic planning. Again, we highly
recommend working with your advisory team (a tax
accountant, a financial advisor/broker, an investment
strategist, a financial planner, an estate attorney and
your company counsel) to help put a financial plan
together prior to your liquidity event. There is no “one
size fits all” solution; the best solution will likely not be
a single strategy, but a combination of several strategies
that is customized for your unique situation. Focus on
understanding the alternatives and work with your
advisor to determine which strategy or strategies will
help you meet your goals. The strategies listed are
not suitable for all investors and there can be a high
degree of risk with exposure to potentially significant
loss. Because of the importance of tax considerations
to all options and stock transactions, consult with your
tax advisor to evaluate how taxes can affect the outcome
of contemplated options and stock transactions.
Congratulations on your company’s IPO or acquisition!
Appendix A.
Financing phases of a typical emerging growth company.
Formation and founders’ round. An emerging growth
company starts its formal, legal existence upon
incorporation of the entity by one or more founders,
typically when there is little more than an idea they
hope to build into a valuable company. At formation,
founders stock (common stock, most or all of which is
subject to vesting) is issued to the founders for a
nominal price, like 1/10th of a cent per share.26, 37
An equity incentive plan is also normally adopted at
formation in order to have a pool of common stock
reserved for grants of restricted stock, RSUs or options
to future employees, contract workers, consultants,
advisors and directors.
Convertible note and warrant financing (aka the seed
round). The first financing event (typically after some
bootstrapping) for most companies is to raise a modest
amount of money from friends and family or angel
investors by issuing convertible notes, sometimes
with warrants. This is often called the seed round.
Convertible notes provide a simple way to avoid valuing
the company but give the early investors an opportunity
get a fair deal. The notes typically convert into preferred
stock when the company completes its first preferred
stock financing and professional or sophisticated
investors determine an appropriate valuation.
In order to compensate early investors for the risk of
investing at an earlier stage, convertible notes typically
provide a “kicker” in one of two ways: the first and
simplest is where the note converts into preferred stock
at a price discount (e.g., 20 percent). The second is
where warrants (essentially options to buy common or
preferred stock) are issued along with the convertible
note, giving the early investor an extra upside potential.
Preferred stock financings. When the company has
enough value to attract angel investors and/or VCs,
it raises more capital through one or a series of
convertible preferred stock financings. Preferred stock
has certain economic preferences over common stock
as we highlighted earlier. If the company is doing well,
each successive round of financing is represented by a
new series of preferred stock (series A, series B, etc.)
which is sold at a higher price per share than the
previous series. If the company is not doing well, it may
have to raise capital with a “down round” where the new
series of stock is priced lower than the previous series.
IPO or acquisition. The final financing phase for most
emerging growth companies (and liquidity event for
existing stockholders) involves either an acquisition by
a company that has the ability to fund future growth or
an IPO.27, 38
From Startup through IPO or Acquisition
11
End notes.
Stakeholders are holders of stock, options or restricted stock units (RSUs)
and include founders, officers, employees and early stage investors.
2 This paper is aimed at U.S. citizens and residents who are equity
stakeholders in U.S. companies. It does not address international issues,
such as tax, or other rules applicable to non-resident aliens or non-U.S.
companies.
3 For this paper, venture-backed means funded by professional venture
capital firms and companies funded only by high net worth individual
angel investors.
4 PricewaterhouseCoopers National Venture Capital Association
MoneyTree Report, Q1 2102 [https://www.pwcmoneytree.com/MTPublic/
ns/moneytree/filesource/exhibits/MoneyTree%20Report_Q1%202012_
Overview.pdf ]
5 For example, SecondMarket has created a market to facilitate
transactions in both debt and equity securities in high growth private
companies. Through SecondMarket, private companies and their
shareholders can access an organized, controlled private liquidity market
that offers early investors and employee shareholders an exit
opportunity prior to an IPO or M&A event. Numerous high profile
companies have traded over SecondMarket including Facebook, Tesla,
Zynga and Twitter. Sources: “With Private Trades, Venture Capital Seeks a
New Way Out,” New York Times, April 22, 2009”; “How Can Twitter And
Facebook Employees Cash Out Now,” Washington Post, June 23, 2009
6 Globalizing Venture Capital: Global venture capital insights and trends
report 2011, Ernst & Young, 2012
7 “Venture-backed IPO Volume Flat in Third Quarter of 2012,” Thomson
Reuters/National Venture Capital Association press release, October 2, 2012
8 “Tax Advice from the Dot Com Bubble; Beware of ISOs,” Douglas
Greenberg blog, SFGate.com, June 22, 2012
9 Growth companies are C corporations because limited partners of
venture capital funds are often tax-exempt entities like pension funds,
which suffer negative tax effects from unrelated business taxable
income if a portfolio company in which the venture fund invests is a
partnership. S corporations are not used (at least once cash investors
make investments) because they cannot have more than one class of
stock (i.e., common and preferred stock).
10 But market conditions can cause delays well beyond 12 months. For
example, Kayak filed for an IPO in November 2010 but delayed the
offering for more than 18 months. “Four Companies Break IPO Drought,”
The Wall Street Journal, July 10, 2012
11 The price per share is normally expressed as a range until right before
the effectiveness of the IPO. This is because market conditions,
anticipated operating results and investor demand can change right up
to the IPO.
12 To determine valuation, the managing underwriters and management
typically agree on a list of comparable companies and evaluate the
financial characteristics of those companies against the IPO candidate’s
anticipated and historical financial condition, position in the market and
operating results.
13 Many IPOs of emerging growth companies, for example, have stock
prices in the range of $10 to $20 per share.
14 Lock-up refers to contractual restrictions in an employee’s stock
purchase, option or RSU documents which prohibit any transfer of stock
until at least 180 days after an IPO. If no such restrictions exist, the
managing underwriter will normally require most or all stockholders to
sign lock-up agreements before it starts an IPO.
15 Restricted stock (not to be confused with RSUs) is typically granted to
very early stage founders and employees, often right at formation before
any equity is raised from VCs or angel investors. Restricted stock or
restricted shares can also refer to stock that is vested but not registered
with the Securities and Exchange Commission, and must be sold in
compliance with Rule 144.
16 Restricted stock is typically sold to the employee at its fair market value,
which at formation could be next to nothing. The unvested stock may
be repurchased by the company (or its designee) if the employee’s
service is terminated. The founder/employee normally pays the nominal
purchase price in cash, so there is no taxable income when the 83(b)
election is filed.
1
12
From Startup through IPO or Acquisition
The maximum gift tax rate is 40 percent starting in 2013.
If the grantor is treated as the owner (donor) of any part of the trust
under IRC §§ 673-677, then items of income, deductions, and credits
attributable to that part of the trust will be used in computing the
taxable income of the grantor (donor), IRC § 671. The IDGT is disregarded
as a separate entity for income tax purposes, meaning the grantor can
sell any appreciated asset to the IDGT and the sale will not result in a
capital gain or loss for income tax purposes, Rev. Rul. 85-13, 1985-1 C.B. 184
19 Rev. Rul. 2004-64, IRB 2004-27, 7
20 Several states have abolished the rule against perpetuities and permit
dynasty trusts to benefit future generations, including Delaware and
South Dakota.
21 Coordinate all SEC filings through your company counsel. For general
educational information, see the SEC website on forms 3, 4 and 5.
The SEC website has an example of a Form 3, Form 4, and Form 5.
22 Grants of stock or stock options under employee benefit plans and
exercises of fixed-price stock options are normally exempt under Rule
16b-3, provided certain required approvals are given in advance. But any
sale of option shares is matchable against any non-exempt purchase of
shares within the six-month danger period.
23 As an educational service to investors (not legal advice or official rule
interpretations), the SEC’s website has a summary of Rule 144 sale
requirements. If you have questions on the meaning or application of
Rule 144, consult with an attorney who specializes in securities law.
24 https://www.cafonline.org/pdf/World_Giving_Index_2011_191211.pdf
25 “Insider’s Tax Break,” Forbes Magazine, August 7, 2000
26 Ineligible lines of business include professional services (e.g., law,
engineering or consulting), banking, farming, hotels and restaurants.
27 The stock can be stock you acquire on exercise of a stock option or
vesting of an RSU.
28 This 14 percent rate is advantageous when compared to the current
capital gains rate of 20 percent.
29 To qualify for section 1244 treatment, the corporation’s aggregate capital
(value of money or property it has received for issuance of stock or
capital contributions) must not have exceeded $1 million when the stock
was issued and the corporation must not derive more than 50 percent
of its income from passive investments. Also, the shareholder cannot
have received the stock as compensation, and only individual
shareholders who purchase the stock directly (or through a partnership)
from the company qualify.
30 The holding period for qualified dividend treatment is reduced during
the time that the risk of loss is diminished. I.R.C. §246(c)(4)(C).
31 Id.
32 Revenue Ruling 2003-7 provides an example of a properly structured
agreement with respect to tax deferral wherein the investor: (1) Receives
a fixed payment with no use restrictions; (2) Simultaneously enters into
an agreement to deliver a varying number of shares on a future date
(value TBD on delivery date); (3) Pledges maximum number of shares
which may be required for delivery; (3) Retains the right to receive
dividends and vote shares; (4) Retains the right to settle at expiration
with cash or other shares in lieu of pledged shares; and, (5) Is not under
any legal restraint or economic compulsion to deliver pledged shares.
33 I.R.C. §704(c)(1)(b).
34 Taxable status may be modified by legislation
35 Lack of marketability discount will be modified because there is a known
end date (seven years from contribution) to the restriction on sale of the
fund shares underlying the partnership interest.
36 Congress has proposed a minimum duration of 10 years for GRATs, which
would preclude a short-term strategy if ultimately passed into law.
37 The company normally can justify a zero value at formation because
there is no revenue, mature intellectual property, contracts, etc.;
sometimes not even a business plan exists.
38 However, a growing trend is to seek an acquisition or IPO primarily as a
way to enable founders, employees and investors to turn their private,
illiquid stock into cash. Facebook and Google are recent examples of
companies that did not actually need to raise additional funds (because
they were able to raise large amounts in private financings and were
profitable), but needed to provide a liquidity event in order to retain and
motivate employees and meet the expectations of pre-IPO investors.
17
18
Disclosures.
The information in this report is for educational purposes only and should not be used or construed as financial advice or a
recommendation to participate any strategy mentioned herein. Wells Fargo does not guarantee that the information supplied
is complete, undertake to advise you of any change in its opinion, or make any guarantees of future results obtained from its
use. The concepts discussed in the paper require the assistance of qualified legal counsel and tax advisors and investors
should consult their own attorneys and tax advisors with respect to their own situations.
Wells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries.
This information is for educational purposes only and should not be used or construed as financial advice, a solicitation of an offer to buy or sell, or a recommendation for any security or strategy mentioned
herein. Wells Fargo does not guarantee that the information supplied is complete or timely, undertake to advise you of any change in its opinion, or make any guarantees of future results obtained from its use.
Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.
Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is
realized by you depends on the specific facts of your own situation at the time your taxes are prepared.
Because of the short-term nature of options, it is likely that they will be traded more frequently than stocks and bonds. With each option-related trade, a commission will be incurred. Commissions on option
transactions generally amount to a higher percentage of the principal than commissions for normal stock trades.
Trading in options can result in losing the total amount of premiums and commissions paid. Additionally, when covered call options are sold, the underlying securities must be delivered at the strike price upon
exercise of the option.
Additional information is available upon request.
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