Protecting Your Gains in Company Stock
by Erik Hayden, on Mar 17, 2022 2:33:03 PM
Many tech workers get company stock as part of their total compensation. In 2021, the 20 largest U.S. IPOs generated an estimated $41 billion in pre-tax value for employees who held stock options in those companies, according to data from Secfi. That’s a lot of cash.
But the key word is pre-tax. There are two kinds of levies generally due on stock options: personal income tax when they are exercised, and capital gains tax when (if) the shares are later sold for a profit, i.e. above the option strike price. While not a lot can be done about the former there are a few ways to defer the latter under the right circumstances. One of the most compelling is investment in a qualified Opportunity Zone (OZ) Fund. Learn more about Opportunity Zone investing here.
There is a general rule of thumb that you should not have more than 10-15% of your net worth invested in company stock. In spite of this, it’s likely that many tech workers are significantly over concentrated in shares of their employer. One study of 1,000 tech workers conducted by the investment firm Candor found that some employees may have as much as 90% of their wealth tied up in company stock.
This creates risk on multiple levels. Not every newly minted public company will be successful. Shares can be volatile and subject to dilution. In the meantime, the shareholder/ employee is exposed to a potential cascade of negative events: the company doesn’t grow as fast as expected. The stock goes down. Career opportunities are jeopardized.
While these are recognized risks, the prospect of a big capital gains tax bill may lead many tech company employees to hold on to their stock and hope for the best. But those with current or potential qualifying gains should keep in mind that there are other options to consider.
Our Opportunity Zone Fund II LLC (“Fund II”) launched in 2021 with Icon/Echo may be one of the solutions. This project focuses on multifamily and office space in downtown San Jose, a city recently named #1 in the U.S. for attracting innovation-oriented industries by the real estate services firm JLL. We believe Icon/Echo is a perfect blend of an urban environment in Silicon Valley. Investors living in the region will literally be able to watch this project as it comes out of the ground.
Contact us to learn more.
The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by an issuer, or any affiliate, or partner thereof ("Issuer").
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With respect to any performance levels outlined herein, these do not constitute a promise of performance, nor is there any assurance that the investment objectives of any program will be attained. All investments carry the risk of loss of some or all of the principal invested. Assumptions are more fully outlined in the Offering Documents/ PPM for the respective offering. Consult the PPM for investment conditions, risk factors, minimum requirements, fees and expenses and other pertinent information with respect to any investment.
These investment opportunities have not been registered under the Securities Act of 1933 and are being offered pursuant to an exemption therefrom and from applicable state securities laws. All offerings are intended only for accredited investors unless otherwise specified.
Past performance are no guarantee of future results. All information is subject to change. You should always consult a tax professional prior to investing. Investment offerings and investment decisions may only be made on the basis of a confidential private placement memorandum issued by Issuer, or one of its partner/issuers. Issuer does not warrant the accuracy or completeness of the information contained herein. Thank you for your cooperation.
Real Estate Risk Disclosure:
- There is no guarantee that any strategy will be successful or achieve investment objectives including, among other things, profits, distributions, tax benefits, exit strategy, etc.;
- Potential for property value loss – All real estate investments have the potential to lose value during the life of the investments;
- Change of tax status – The income stream and depreciation schedule for any investment property may affect the property owner’s income bracket and/or tax status. An unfavorable tax ruling may cancel deferral of capital gains and result in immediate tax liabilities;
- Potential for foreclosure – All financed real estate investments have potential for foreclosure;
- Illiquidity – These assets are commonly offered through private placement offerings and are illiquid securities. There is no secondary market for these investments.
- Reduction or Elimination of Monthly Cash Flow Distributions – Like any investment in real estate, if a property unexpectedly loses tenants or sustains substantial damage, there is potential for suspension of cash flow distributions;
- Impact of fees/expenses – Costs associated with the transaction may impact investors’ returns and may outweigh the tax benefits
- Stated tax benefits – Any stated tax benefits are not guaranteed and are subject to changes in the tax code. Speak to your tax professional prior to investing.
Opportunity Zone Disclosures
- Investing in opportunity zones is speculative. Opportunity zones are newly formed entities with no operating history. There is no assurance of investment return, property appreciation, or profits. The ability to resell the fund’s underlying investment properties or businesses is not guaranteed. Investing in opportunity zone funds may involve a higher level of risk than investing in other established real estate offerings.
- Long-term investment. Opportunity zone funds have illiquid underlying investments that may not be easy to sell and the return of capital and realization of gains, if any, from an investment will generally occur only upon the partial or complete disposition or refinancing of such investments.
- Limited secondary market for redemption. Although secondary markets may provide a liquidity option in limited circumstances, the amount you will receive typically is discounted to current valuations.
- Difficult valuation assessment. The portfolio holdings in opportunity zone funds may be difficult to value because financial markets or exchanges do not usually quote or trade the holdings. As such, market prices for most of a fund’s holdings will not be readily available.
- Capital call default consequences. Meeting capital calls to provide managers with the pledged capital is a contractual obligation of each investor. Failure to meet this requirement in a timely manner could elicit significant adverse consequences, including, without limitation, the forfeiture of your interest in the fund.
- Opportunity zone funds may use leverage in connection with certain investments or participate in investments with highly leveraged capital structures. Leverage involves a high degree of financial risk and may increase the exposure of such investments to factors such as rising interest rates, downturns in the economy or deterioration in the condition of the assets underlying such investments.
- Unregistered investment. As with other unregistered investments, the regulatory protections of the Investment Company Act of 1940 are not available with unregistered securities.
- It is possible, due to tax, regulatory, or investment decisions, that a fund, or its investors, are unable realize any tax benefits. You should evaluate the merits of the underlying investment and not solely invest in an opportunity zone fund for any potential tax advantage.
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