【Pre-IPO Company Equity: A Wisdom of "Paying Taxes Early"】
For employees or early investors holding company equity incentives (ESOP), an intuitive tax wisdom is: the earlier you pay taxes, the lower the cost.
The core logic lies in the fact that the tax on equity is calculated based on its fair value. When the company is still in its early stages, with a low valuation (for example, 10 million), if you can comply with the regulations and complete the tax payment on this portion of equity, then the tax base is locked in at a very low level. Although a tax payment is required at that moment, it is a relatively controllable cost.
In contrast, if you wait until the company successfully goes public, and its market value skyrockets to tens of billions or even hundreds of billions, and then exercise your options or sell, you will face capital gains calculated in astronomical numbers. This not only amounts to a huge total but may also be classified into a higher tax rate bracket due to the nature of the income.
Do you or your friends hold company equity? How do you plan for this "future wealth" in the long term?
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This does not constitute investment advice.