You often read about IPOs minting a horde of the newly rich. The reality for most of the rank and file is far from that.
As we roll into tax season, an tale from a 2019 IPO 
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6/ Because of the large single year windfall, the employee has now been pushed into higher tax brackets, and the flat 25% removed is not enough. The total effective tax rate in CA for this income w/ standard deductions is ~46%, for a bill of $457K.pic.twitter.com/bqJBhTDkvf
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7/ They previously paid $247.5K through the auto sales-to-cover, so will owe an additional $209.5K at the end of the year. Subtract that from their $445.5K take home and they net out $236K or about 24% of what appeared to be a million dollar payday.
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8/ This is a bit oversimplified, as it's likely this person has additional yearly income from their base salary (and the additional tax implication), and perhaps they would be able to do more than the standard deduction.
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9/ I must stress this is not to make light of this amount of money - it's significant, especially in one shot. It's also important to consider how many years an employee put in at what was likely below their market rate. This is about $59K/yr for a 4 year assignment.
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10/ So tl;dr - IPOs probably bestow way less money on large groups than some stories would lead you to believe - Taking illiquid stock is a big risk, and there is some lost time-value-of-money in these groups being paid below market, and likely results in other pay inequities
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Thanks for listening and interested to hear where I may have gotten this wrong, right, or otherwise!
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Thank you for all the great questions and comments! Addressing some of the most common: Q: Can't you just claim a capital loss? A: Yes, but it's severely limited to the point that it won't help. In our example, the employee will be deducting $3000 a year for over 100 years.pic.twitter.com/bAusVBufdC
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Q: Don't RSUs follow a vesting calendar? A: Yes, RSUs follow a vesting calendar. Vests before liquidity events (e.g. IPO) are not taxable events. But once the IPO happens, all of the already-vested RSUs become instant regular income *on that day* in the eyes of the IRS.
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Q: You're wrong - tax requires exercise or sale. A: That's true for various kinds of *options*. This example is about RSUs, the most common equity compensation vehicle for private companies heading towards IPO.
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Q: Why don't companies let you choose how much is sold to cover taxes? Or why don't they sell a higher amount? A: I don't know. In my two experiences, 25% was used. Explanations were that this is standard (max?) or that everyone's situation is different, so they pick a # ...
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(I would love to know if anyone knows the actual reason why 25% is so commonly used - my research didn't turn up much. I am guessing it's as much about easier administration of the event as it is about anything else.)
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A wild friendly securities lawyer appearshttps://twitter.com/JuvenileBluster/status/1222550458629283840 …
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