Prioritized Selling When You Own Multiple Grants
When your company is publicly traded and you own multiple types of grants (ISOs, NSOs, RSUs), and/or grants with different strike prices -> here's how to think about prioritizing which to sell first
Which Grants Should You Sell First; And Why?
If you were an early (or earlier) employee at company that eventually went public/IPO'd, it's likely that you have multiple types of stock-comp (ISOs, NSOs, and RSUs), as well as options with different strike prices. Like so many things with stock comp, there is "no right answer" for everyone; what's right for you depends on your holdings and circumstances. But that said, the below is a reasonable way for most individuals to consider and prioritize their selling based on their holdings.
Potential Rank-Order Prioritization
Sell 100% of RSUs as they vest. There is no tax benefit to holding RSUs after they vest. So selling them helps reduce concentration risk.
Sell NSOs with large gains and all that expire soon. Any NSO with gains that will expire soon should be sold to capture value (otherwise it will expire worthless). Also, any NSOs with large gains have very little option leverage value, and there is no tax benefit to holding longer, so divesting makes sense.
Sell stock held 1 year or longer. If you own stock and have held it for more than 1 year (achieving long-term capital gains treatment), there is no additional tax benefit to achieve by holding longer (excepting QSBS). If you have multiple tax lots, make sure to prioritize your selling across those!
Sell ISOs with large gains. Exercising ISOs and holding for a qualifying disposition has tax benefits (and also likely AMT implications). However, to manage concentration risk, many times it can make more sense to exercise and immediately sell (a disqualifying disposition). Careful consideration of the pros/cons here is highly recommended.
Sell NSOs with small/modest gains. NSOs with small or modest gains have option leverage value (potentially significant value). You want to carefully consider the pros/cons of exercising and selling today to capture today's value versus the potential leveraged future value if you wait.
Sell ISOs with small/modest gains. ISOs with small or modest gains have option leverage value (potentially significant value), and ISOs also have the potential for preferential tax treatment if you exercise and hold to achieve a qualifying disposition. You want to carefully consider the pros/cons of exercising and selling today to capture today's value versus (1) the potential leveraged future value if you wait, and (2) the potential tax benefits if you pursued a qualifying disposition.
Key Considerations
Your financial plan and cash needs. In almost all circumstances, your financial plan > your investment portfolio > tax optimization. Your personal financial plan/needs, and your divestment/sale plan should be key inputs.
After-tax-exposure. The types of equity compensation and stock that you hold likely have multiple different after-tax exposures. For example, a $1 change in the stock price will provide more after-tax wealth for stock with long-term-capital-gains versus a deeply in-the-money NSO.
Option leverage. As detailed here, options have implicit leverage built into them; how much implicit leverage (and value) depends on the option strike price as compared to the current market value. Option leverage is financially beneficial to you, and all else equal one should typically prioritize selling options with less leverage value versus options with more leverage value.
Future income. If you anticipate a change in income in future years, it may make sense to adjust the selling order/priority to save on taxes. For more information and strategies on this see: Income Tax Strategies
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