Maximizing After-Tax Cashflow from Equity Compensation with Aaron Rubin

Aaron Rubin runs a wealth management practice that combines tax, financial planning, and investing as an attorney, CPA, and CFP®. Aaron assists his clients in minimizing their tax liability and retaining more of their equity compensation so that they can support the people and causes they care about the most. He works with pre-IPO executives and early employees at late-stage tech companies in Silicon Valley, Austin, and the Tech Triangle.

Aaron graduated from Claremont McKenna College with a BA in Economics-Accounting-Spanish Literature and the University of Illinois with a Juris Doctorate. He previously worked in Deloitte’s Private Client Advisory Department and worked in public accounting for three years on individuals, trusts, and estates before transitioning to wealth management. He earned his CPA in 2008 and his CFP® in 2010. Aaron’s first book, “Financial Adulting,” was published in 2019 as a guide to help young professionals navigate tax, investment, and estate planning.

He and his wife, three daughters, two Goldendoodles, and five chickens live in the San Francisco Bay Area.

Episode Highlights Here:

Aaron Rubin:

You got to keep on doing those tax projections and doing the projections of the stock over a long period of time.

Pierce York:

What’s the number one secret to maximizing after-tax cash flow with these IPOs? Let’s talk about that.

Aaron Rubin:

The secret is you need to start planning well before the IPO process starts. A lot of people when they go into a new company whether it’s working, or whether it’s investing in it they don’t take the steps they need to do on that on day one, that’s going to help them immensely down the line. So for instance, there are a lot of people who fail to make 83B elections on their stock. So what that means is that they get taxed over time, rather than upfront when the tax would be much lower. The secret is, you got to keep on kind of doing those tax projections and doing them the projections of the stock over a long period of time, and you can’t just forget about and just say okay, well, these options exist, but I’m sticking my heads down, I’m at my job, which is understandable. I’m just gonna ignore these stocks until I have to do something with them. Then by that time, it’s too late. There’s not a whole lot you can do.

Pierce York:

So I’ll give you an example. You can let me know from there. So, I have a brother-in-law who works at Acorns and has 5,000 stock options at 92 cents. They’re set to IPO if they haven’t already. They’re gonna go 20 bucks a share. Now, that’s a smaller case, of course. So, what does he need to do in order to walk me through the process?

Aaron Rubin:

So, I don’t know when your brother-in-law started. But if he started three years ago, when the valuation of the company when he started was 92 cents. It’s possible. Again, different companies have different rules. So again, it’s hard to make general statements when every company has its own stock plan. But assuming that he could have let’s say, early exercise the stock. By that I mean, purchased the stock before it technically vested, the difference between the evaluation and what he paid for it would be zero. So then what happens is, you could say, you can tell the IRS, that you will essentially have to pay the 90 cents a share to the company before you actually vest those shares. You tell the IRS, by the way, I did this, and I want you to tax me on the difference between the strike price and the fair market value, which is zero. So you pay zero tax upfront, but you have to pay, you buy the shares, and as those shares are vesting, the value has gone from 92 cents to $1.50 to $3. And it keeps going up over time. When that happens, and when they vest when you should get the shares, you don’t get taxed on those shares, because you already paid the tax already, because you told the IRS, tax me on this. Now, when you go to sell them, you’re going to owe the tax, but you don’t have to pay the tax incrementally along the way. And that could save you some money, especially if we’re talking about nonqualified options, the Delta ends up on your W2. And you know, offsetting W2 income is very difficult. So, if he was included W2 over the last four or five years, by the end, he could have you know, I mean, again, it’s 5,000 shares, it’s not 50,000 shares, but again the higher the number, the more valuable it is, you avoid paying tax later on for W2 and you get to move that all into capital gain, which can be offset a lot more easily. That’s something that you have to do early on, and you have to have foresight, and you have to have a little bit of cash and a little bit of luck because if it won’t work out you’re not going to be happy.

Pierce York:

So there is an absolute risk involved with doing this particular strategy because of the company that the startup goes belly up, then you’re left with the shares that you’ve already purchased that are essentially worthless now that you could probably take those and do like a task, like tax-loss harvest or something like that. And you know, and try and manipulate it for for the future. But yeah, it sounds like you have to really be confident in your company that it’s gonna go.