The IPO tax cliff
Double-trigger RSUs at Carbon defer the taxable event until a liquidity event. When the IPO prints, years of accumulated vested-but-not-settled RSUs all land as ordinary income in one tax year. For senior employees at a mature private, this commonly exceeds $1M of single-year ordinary income, pushing into the top federal bracket.
Moves to make before the S-1
Consider early exercise of ISOs if still permitted, to start the QSBS 5-year clock and position for qualifying disposition. Consider a 10b5-1 plan adoption during an open window. If you have vested NSOs, evaluate exercising them before a 409A uplift makes the spread prohibitive. Fund an HSA, Roth, and after-tax 401(k) (mega-backdoor) to the maximum in the months before the liquidity event, while your ordinary income is still at the pre-IPO baseline.
What to avoid
Exercising large ISO blocks in the calendar year of the IPO without modeling AMT. The combination of RSU ordinary income in the IPO year plus an ISO bargain-element preference item can generate multi-hundred-thousand-dollar AMT bills on top of an already large regular-tax liability.
Frequently asked
- Is Carbon stock publicly tradable?
- No. Carbon is a late-stage private company. Shares can only be transferred through approved secondary market platforms, company-run tender offers, or private sales subject to right of first refusal.
- When should I exercise ISOs at Carbon?
- The answer depends on the current 409A, your own AMT capacity, and the probability of a liquidity event in the next 12-24 months. Model AMT before any exercise larger than $50k of bargain element. The active secondary market lets you sell some vested shares to cover exercise cost and tax.
- Does QSBS apply to my Carbon stock?
- Potentially, if Carbon was a C-corporation at issuance with under $50M in gross assets, and you acquired the stock at original issuance (or via ISO/NSO exercise) and will hold it five years from acquisition. Request a QSBS attestation letter from the company before you need it at sale.
- Should I participate in a Carbon tender offer?
- Usually yes for some portion, to reduce concentration risk. The full-stack question is: what percentage of your net worth is in Carbon? What's the tender price versus 409A? What's your tax rate on the gain? Run the secondary-sale calculator before responding.