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One of the biggest differences between a private company’s equity and public company’s equity is liquidity. Private company equity holders may have very limited liquidity. Public company equity, by contrast, has more liquidity than private company equity as public stocks are traded daily through public market exchanges.
From Goldman Sachs Insights, here are some important planning opportunities and considerations to weigh when evaluating private company equity compensation:
If you receive private company equity as payment for your services, you may have income when you receive the equity, when you exercise an option, and/or when you dispose of the equity received. Consulting a tax and/or a financial advisor may help you determine your best course of action when receiving private company equity.
The general rule is that once a service provider’s compensation is no longer subject to a SRF (Substantial Risk Forfeiture), it will be subject to taxation. There are certain situations, however, where this general rule does not apply and the timing of taxation differs. For example, if a service provider makes a timely §83(b) election on a property interest (subject to SRF) at grant or if an equity grant is deferred after the SRF has been met.
Again, a tax and/or financial advisor can help to guide you through the tax complexities, including when to exercise your options and the consequences. The rules are complicated. But it’s important to remember that this is a part of your employee compensation package and making certain that you can maximize the benefits is important in order to help you to reach your financial goals.
Speak to your advisor if you have questions about private company equity compensation. If you don’t have an advisor and are interested in learning more about Goldman Sachs Ayco Executive Financial Management, contact us today.
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Updated for tax year 2022