Using Carta for Equity Management
As a stock option holder with Lassen Peak, you have likely received (or you will at some point) a notice from Carta congratulating you on your stock vesting. Carta is our cloud-based equity management tool which is intended to help us, our attorneys, and you to more efficiently manage your equity holdings in Lassen Peak.
The notices you receive from Carta are automatic notices and we, Lassen Peak, cannot control them. However, we understand they have caused some confusion among our valued equityholders. Therefore, we are sending this document to you to provide basic information about what the notices may mean to you.
We are not, however, providing advice or recommending any particular action or nonaction. Each equity-holder is unique, and as always, we recommend seeking guidance from your tax advisor.
The following was extracted from a blog written by a wealth management advisor, as well as other sources, which we thought might be helpful in explaining what one can do when stock options vest:
What You Can Do with Vested Stock Options
In general, once stock options vest, there are really only three routes to take.
Route #1 is to basically do nothing and just hang on to them. This is the easiest thing, as it requires no effort on your part.
Route #2 is for you to exercise the options and hold the stock. This is where you go ahead and make use of your options to buy stock at the discounted exercise price. Once you’ve purchased the stock, you keep it as a part of your portfolio. This will increase your portfolio value, but you will receive no immediate cash reward.
Route #3 is to exercise the options and then immediately sell the stock. This allows you to quickly convert your options to cash for use in other areas of your life. Typically, there is no open market for a privately traded stock, so this route is not available in this case of a “private company.” However, this is often the route taken by most stock option holders once a private company “goes public” through an IPO and becomes liquid, or in concert with a purchase by another company.
Things To Consider When Making Your Decision
Within a privately held company, you essentially have two different possible routes that you can take once your options vest. If or when the company becomes liquid, you will have the third route. But which is best? The best choice for you will depend on a variety of factors. One important decision is the following:
Cash Or Cashless Exercise?
In generally, with stock options, you’re not actually given the stock. Rather, you’re given the right to purchase stock at a specified price. Since it is a purchase, you need funds to make the purchase. If you have enough cash, you can pay for the stock and/or tax withholding with it in what is called a cash exercise.
If or when the company becomes liquid, even if you don’t have cash, in some cases, you can still exercise your options in what is called a cashless exercise. In a cashless exercise, a portion of the stock shares are sold in order to cover the cost of the purchase and/or taxes. You don’t need any cash up front, but you end up with fewer shares in the end. Once again, since there is typically no marketplace to sell privately held stock, this method of transaction is not available until an event that enables selling shares in a market.
Taxes
Stock options are compensation and could therefore be taxable when exercised. The kind of options they are, whether Incentive Stock Options (ISOs) or Non-Qualified Stock Options (NSOs), will determine how they are taxed. In other words, the exercise event carries risk along with reward. Since the tax impacts of stock options can be significant, it is important to work with a tax professional with experience in this area when deciding if, when and/or how to exercise your stock options.