EVERFI, Inc., based in Washington DC, just raised $190 million from some of the most well-known investors and tech names around. Jeff Bezos, Eric Schmidt, Evan Williams and others partnered with The Rise Fund and TPG Growth to being a massive round of capital to EVERFI and expand their SaaS ed-tech platform. You can learn more here: http://everfi.com/everfi-lands-historic-190-million-investment-from-the-rise-fund-tpg-growth-and-existing-investors/
Existing employees at EVERFI now are presented with an opportunity that should be weighed carefully. Undoubtedly, the 409(a) valuation will increase, quite possibly a significant amount. The 409(a) is the internal Fair Market Value (FMV) of the stock for tax purposes and becomes critical in determining how and when to exercise options, whether ISO’s or NSO’s.
Can I Still Leverage The Current 409(a) Before It Increases?
Maybe….but probably not. Often times, when these types of rounds are in process, the 409(a) value becomes retroactive. Let’s look at an example. If you have incentive stock options (ISO’s) with an option price of $1 and the current 409(a) prior to the increase is $4, when you exercise you will be subject to AMT on the $3 difference. The worst case here is just above 30% AMT on the spread.
If you have 10,000 options you exercise at $1 – your AMT “income” would be $30,000 which is simply the $3 spread multiplied by the number of options exercised. While there are often options you can exercise tax-free, let’s assume the full exercise is subject to AMT – you would owe $9,000+ in taxes when you file your return in 2018 for tax year 2017.
If you are subject to the “new” valuation – let’s say its $8 – things just got way more expensive. With the same example you now have a $7 spread and with 10,000 options exercised you could now be looking at $21,000+ in taxes. Confusing? We can help.
We do recommend you ask around to see if any window remains to exercise at the “lower” 409(a) valuation. It is also a great reminder as to why exercising early and often when working at a high-growth company is critical.
What Should I Be Doing With My EVERFI Equity?
You need a plan and it should be goals based. While tracking the recent Okta, Inc. IPO we have started a series on the planning you should be doing – check them out here.
A great first step is determining how many options you can exercise tax-free at the new 409(a) valuation. The majority of taxpayers have the opportunity to do this. We can calculate this for you – and do it often without charging a fee – so contact us to discuss.
The next step is determining the level of “investment” you are willing and financially capable of making into a tax-efficient plan. Often times, the best answer is to exercise everything now, but that isn’t financially feasible. Finding that balance is critical and coordinating with your goals, even more important.
You should also consider “risk-management” to protect you and your family against a sudden unknown such as death or disability. Employers generally have plans that provide a minimal benefit, but you could risk losing all un-vested options if something happens before you can see it through. We recommend “gap-coverage” at a minimum to protect against these risks. This should also be done in coordination with goals and needs.
It’s a lot to take in, we can help you figure out out.
Want an instant view into your equity? Sign up with our online equity platform and see what it’s worth.