Instacart is eying an IPO (Initial Public Offering) in the coming months. How can employees best prepare to handle RSUs and stock options?

On August 25, 2023, Instacart filed its S-1 with the SEC with the intent to take the company public after many fits and starts over the past few years. With the thawing of the IPO market picking up speed, now is the perfect time to review your equity compensation strategy if you have Instacart equity.

We’ll review a few action items to take now so you can be as tax efficient as possible.

Have a Tax Plan for RSUs

Over the next several months, there will be a number of tax events that can greatly impact your tax liability. Some of these you will have control over and some you will not. It’s important to understand each event and how it will impact your finances.

If you have double-trigger RSUs and have already met the service requirements for your shares, the IPO will be the second trigger making the shares taxable to you. Even if you can’t sell them – more on that later. While you can’t control the taxable event, you’ll want to be prepared for the consequences.

The company will be required to withhold some shares for the payment of taxes. The required default is 22% for Federal income tax withholding and 10.23% for California. We’ll focus on the 22% Federal withholding here since California’s withholding rate is already at the top end of their tax rate schedule.

Time and again employees are surprised that withholding from their RSUs is not enough to fulfill their tax obligations at tax filing time. That is because the 22% withholding is often not nearly enough when a big tax event comes along. The 22% tax bracket only covers income up to $95,375 for singles and $190,750 for married couples. If your income (wages + stock compensation) is expected to be above these levels (or way above these levels), your withholding is going to be much too low leaving you with a hefty tax bill next April.

While it’s too early to know at this point, some tech companies have been offering an alternative withholding rate election for employees at 37%. While this withholding rate might be a little overkill, it would provide some certainty in avoiding a big tax bill. Also, if you are speculating that the value of Instacart stock will go down after the IPO, this is a good hedge to get some additional liquidity at the opening bell.

Oftentimes, the election for additional withholding has a quick deadline. So pay special attention to any communications from the company over the next few months.

Instacart Conditions

In the S-1 filing, the company has indicated employees can only sell shares of stock based on the following conditions:

  1. After 6 months from the IPO date
  2. The opening of trading on the first trading day after any 10-consecutive trading day period during which the closing price of our common stock on Nasdaq has exceeded 120% of the initial public offering price per share

Historically, many companies’ stock prices decline after an IPO. But Instacart is providing an out here in case the IPO goes stunningly well. I wouldn’t count on being able to sell these shares until six months after the IPO date. However, now is a good time to think about what actions to take if they do meet this second condition. 

While it’s great to have some additional liquidity available, gains from shares held for less than one year will have higher effective tax rates since they are considered short term gains for tax purposes.

Employees with Stock Options

If you’re a long time employee with Incentive Stock Options (ISOs), you have the additional tax complication of the Alternative Minimum Tax (AMT).

The AMT taxes you on the “phantom” income you earn when the fair market value of the stock options are higher than the exercise price of the shares. This additional tax applies even in the event that you can’t sell your shares.

It’s important to plan for AMT since there are mitigation strategies to help avoid it. There is an annual AMT exclusion. It allows you to exercise and hold a certain amount of shares without incurring additional AMT. You’ll want to be aware of this number and consider exercising shares before the IPO to take advantage of this.

You will generally be allowed to continue to hold your ISOs beyond the IPO date. With the six month lockup period, you may not have liquidity until 2024. Splitting transactions across multiple tax years might save you cash tax dollars. That is because you’ll have an additional year of AMT exemption to use.

While the best time to plan for your equity compensation was yesterday, the second best time to plan is now. Having a solid tax plan in place can save you thousands of dollars. If you need assistance with your equity compensation, please reach out for an introductory call.

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