Pre-Transaction Planning

Four questions to ask before the sale or IPO of your business.

Who is making your personal wealth decisions while you are focused on building your business? Ignoring the impact of your successful business on your personal wealth is a common oversight of busy founders and executives.

Planning your personal finances long before the transaction will help you understand the optimum value of your equity interests, and the potential tax impact.

After years of hard work, you’ve built a highly successful business. As a founder or executive of your organization, you need to plan for getting the most value out of your equity interests as you prepare for a sale or initial public offering (IPO). Planning your personal finances long before the transaction will help you understand the optimum value of your equity interests, and the potential tax impact.

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Begin your pre-transaction planning the moment your company achieves significant market value. Consider the following questions.


From the start, make sure you fully understand the nature and structure of your equity interests in your business—tax and gifting considerations vary for shares, options, and restricted stock—and know whether the options are incentive stock options (ISOs) or nonqualified stock options (NQSOs).

With your equity interests identified, consider which holdings are subject to vesting; whether your business permits early exercise of options or an 83(b) election for non-vested equity interests; and whether your business permits the transfer of shares.

The question of whether and when to exercise or hold ISOs and NQSOs takes careful planning before the transactions.

“For a founder or executive, pre-transaction planning can take many forms, depending on individual objectives,” says Jordan Sprechman, practice lead of J.P.Morgan’s US Wealth Advisory. “Such preparation covers many considerations, including liquidity needs, estate planning, and philanthropic goals.”

These options vary significantly and their characteristics are complex. For example:

  • Only company employees can receive ISOs, but both employees and independent contractors or non-employee board members can receive NQSOs.
  • The exercise of ISOs is not subject to ordinary income tax, but the spread—the difference between the strike price and market value—is subject to the alternative minimum tax.
  • The exercise of NQSOs is considered compensation income and is subject to ordinary income tax.

Many entrepreneurs exercise their options, particularly ISOs, well before the option expiration date. This may lead to a more favorable long-term capital gain tax rate on future share appreciation. Once the options are exercised, the difference between the strike price and the fair market value of common stock is insignificant.


If you intend to hold most of your ownership as a capital asset, you might consider making an 83(b) election, which would classify your shares of company stock as equity for tax purposes.

This strategy assumes the shares will have appreciated in value and you will still be at your business when the interest vests. If both assumptions hold, your vested interests would be treated as a capital asset, not as compensation income, so any proceeds on their sale would be taxable at lower, long-term capital gains tax rates rather than at ordinary income rates.

But evaluate this strategy carefully. If neither assumption plays out, you might have paid taxes on worthless or forfeited stock.


If you want to reduce the risk of overexposure in your holdings while diversifying your portfolio, you might opt to receive some of your proceeds from your sale or IPO in cash.

If that’s your plan, make sure to structure any sale or redemption of your interest in the company to minimize tax liability.

But be conscious of how fellow shareholders and executives, potential buyers, and the public might interpret your action. Could your decision to receive cash cause them to question your motives (or the value of your business)? You’ll need to form a strategy to manage any misperceptions as part of your pre-sale planning.


Now is the time to think ahead about how to transfer wealth to your family and to the causes you care about. Things to consider:

  • Plan ahead. Estimate your cash flow and spending needs over time. Once you have a plan that leaves you with enough assets to support yourself and your family, you can think about how to transfer your interests in the business, or the proceeds of a sale or IPO, to family as well as charities and important causes.
  • Set up a trust. As you plan, think about setting up a trust for transfers to family for those assets that you expect to appreciate. A trust can allow the transfer of those assets with valuable tax efficiency.
  • Establish philanthropic goals. When gifting to charities, you might establish a donor-advised fund or private foundation as a charitable giving vehicle, depending on your longer-term philanthropic goals.
  • Give strategically. You might make a gift to a charity of a highly appreciated asset, such as post-IPO stock, because the charitable income tax deduction is generally based on the fair market value of the gift.
  • Time it right. You may have the option to gift pre-sale private company stock to charity. Timing is important: This strategy can help you offset the high-income year when you sell your business with a corresponding charitable contribution.


In your situation, you have to anticipate the sale or IPO of your business and start planning now. By doing that, you’ll accomplish three valuable things: You’ll inform yourself about what assets you will likely have after the liquidity event and how to handle them, you’ll start developing the strategies you need to have in place at the time of the sale or IPO, and you’ll know how you’re going to transfer wealth when the time comes.


All case studies are shown for illustrative purposes only and should not be relied upon as advice or interpreted as a recommendation.

This material is intended to help you understand the financial consequences of the concepts and strategies discussed here in very general terms. The strategies discussed often involve complex tax and legal issues. Your own attorney and other tax advisors can help you consider whether the ideas illustrated here are appropriate for your individual circumstances. JPMorgan Chase & Co. does not practice law, and does not give tax, accounting or legal advice. We are available to consult with you and your legal and tax advisors as you move forward with your planning.

The views and strategies discussed here may not be suitable to all investors. This information is provided for informational purposes and is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Past performance is not indicative of future returns.

Lines of credit are extended at the discretion of J.P. Morgan, and J.P. Morgan has no commitment to extend a line of credit or make loans available under the line of credit. Any extension of credit is subject to credit approval by the lender in accordance with the terms contained in definitive loan documents.

Investors should be cautious when holding a highly concentrated stock position, which is generally defined as any individual holding that constitutes more than 30% of overall investment holdings. Tax consequences, including the avoidance of capital gains through selling, do not eliminate the risks of overexposure to a particular company or business sector.

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