SpaceX employees are racing to figure out what to do with their coming bonanzas.
One person who used to work at the company has been in a debate with Eric Franklin, a wealth adviser who caters to tech-company employees. The former employee has company shares worth $21.4 million at the IPO price SpaceX set last week, which represents 93% of his household’s investible net worth. Franklin wants his client to whittle down his holdings once the company goes public.
The client is worried about selling SpaceX too early and is reluctant. “He obviously still believes it’s a special place,” said Franklin, co-founder of Prospero Wealth.
Thousands of past and current SpaceX employees with company shares will soon be able to easily access life-changing fortunes after the company makes its stock-market debut. The same is true for many others with stakes in Anthropic and OpenAI, which have also filed paperwork to go public this year.
Coming into sudden wealth isn’t all easy. Here’s a look at the decisions people are facing.
‘Emotional frenzy’
Tara Shulman, a wealth adviser at Compound Planning, said a key part of her role is creating a diversification plan and holding clients accountable to it.
“We want to try to not be caught up in that emotional frenzy that will certainly take place after the IPO,” she said. “You will drive yourself crazy trying to find the perfect time to sell the stock, but there might be a perfect time to sell the stock for you.”
Selling stock now can allow clients to fund their children’s college education, buy a new house or retire early, she said.
Diogo Mónica, who has amassed sizable positions in a number of startups over his career, set up a plan to avoid rash decisions. The venture-capital investor and co-founder of crypto bank Anchorage Digital has stuck to a strategy of selling 20% of his holdings at the IPO, then gradually selling down another 60% over time. He holds the remaining 20% as a vote of confidence in the company.
He has sold down a chunk of his ownership in Square (now a unit of fintech company Block) where he was an early employee via Frec, an online platform that offers tax-aware investment strategies for self-managed investors.
SpaceX employees are subject to a 180-day lockup period but have the chance to sell some shares earlier during specified windows.
Deciding what—and when—to sell
Many SpaceX, Anthropic and OpenAI employees have a mix of equity compensation, including nonqualified stock options, incentive stock options, restricted stock units and employee stock-purchase plan shares. Each is taxed differently, and a misstep can mean an unexpected tax bill, said Bruce Brumberg, co-founder of mystockoptions.com.
Sell too much stock or exercise too many nonqualified stock options in one year, and you might land in a higher tax bracket.
Incentive stock options can trigger a large, surprise alternative minimum tax bill, so advisers generally recommend creating a tax calendar to exercise them over several tax years.
Restricted stock units create a tax bill when they vest even if you can’t sell shares yet. The default withholding rate of 22% might not cover tax liabilities. “If you’re taking out loans to cover a tax bill and the share price drops post IPO, you still have to pay the taxes,” said Giovanni Tiso, a certified financial planner at Titan.
Employees can sometimes also get more shares through an employee stock-purchase program that typically lets workers buy up to $25,000 worth at a discount of up to 15% each year. Then people have to decide whether to hold on to the shares or sell as soon as they can.
Weighing alternatives to straight sale
Diversifying could be as simple as selling some shares and putting the proceeds into the S&P 500. But there are also more advanced strategies.
Putting the money into a direct-indexing strategy, for instance, could allow an investor to track the index while also generating losses to offset capital gains.
There are also ways for employees to diversify without having to immediately sell and pay taxes. Prepaid forward contracts let employees borrow against their shares for a set period and use the proceeds to diversify their portfolio. They also typically include a “collar,” which puts a floor and a cap on the stock, limiting the employee’s upside and downside. When the contract matures, the employee can sell shares and pay the taxes or extend the strategy by opening another contract.
Also popular are exchange funds, private investment vehicles that let investors with concentrated positions in various companies pool their shares to diversify their portfolios. The Internal Revenue Service generally requires investors to hold their interest in such funds for at least seven years.
Then there are 83b elections for stock grants. These allow recipients to pay taxes on unvested equity, which could save a huge amount if the stock appreciates by the time it vests. If the stock falls, however, there is a risk they could have paid taxes they wouldn’t have owed.
Even with careful planning, there are always risks with company shares.
Franklin, the adviser to the former SpaceX employee, started working at Amazon.com in 1998, the year after the company’s IPO. He was the only person in his training class to sell shares after one year.
When the dot-com crisis happened, the remaining three-quarters of his grant fell under the strike price and expired worthless.
“We all think of Amazon as a great success story at this point,” Franklin said. “It wasn’t always that way.”