Private Company Equity Is Not Cash

Let’s not confuse the promise of money with actual money.

Key takeaways:

• Private company equity is not cash; it is a high-risk, illiquid asset that may never become money.

• The big decisions happen earlier than most employees realize: exercising, taxes, QSBS, leaving the company, and tender offers all require planning.

• Doing nothing can be expensive. Understand what you own now, before a deadline or liquidity event forces your hand.

A lot of the public conversation around money right now focuses on wealth inequality. The gap between people who have too much and people who don’t have enough is getting bigger. We can wait for institutional change (unlikely), increase taxes on the wealthy (also unlikely), or we can do the “great American hustle.” Usually, that involves working too hard and a lot of luck.

Being at the right place at the right time is one of the best ways to build wealth. IF you are an employee at a company and get granted equity of some kind and stick around long enough for that company to be sold or become publicly traded, you may be in luck. If you have access to equity where you work, you need to pay attention. Especially if it’s a start-up and your company is still private.

I’m not talking about private equity here. I’m talking about being an employee at a company that is not publicly traded on any stock market (which is most companies).

When you work at a company that is still privately held, the upside of owning shares of that company can be enormous, the rules are murkier, and the mistakes are more expensive.

The chapter on equity compensation was the hardest chapter in my book to write.

Not to brag, but I know a lot about this shit. And that was actually the problem. Private company equity is one of those topics where the more you know, the harder it is to explain without sounding like a Wikipedia page. There are too many caveats, too many acronyms, too many moments where the answer is, “well, it depends.”

It is deeply technical. It is not naturally interesting. And unfortunately, it can change your life.

So I really need you to pay attention.

First, the bad news

Private company equity is not cash.

It is not even almost cash.

It is ownership in a company whose shares do not trade on a public exchange, which means there is no easy market for selling what you own, no published price (there’s an internal one, which can be murky), and no neat answer to the question, “what is this worth?”

Sometimes it’s worth a fortune. Sometimes it’s worth nothing. Most of the time, it’s somewhere in between.

That uncertainty is the whole game. If public company equity is mostly about deciding when to sell, private company equity is about figuring out whether you should buy, hold, exercise, wait, sell to a new investor, or simply accept that your Carta account is not the same thing as money.

Quick aside on Carta: it’s a portal companies use to track who owns the company, which is called the cap table. Anytime a company wants to issue new shares of ownership, they typically do it through an expensive process with lawyers, or they use a tool like Carta or Pulley. Back in the day, these things were tracked in Excel spreadsheets and even Post-It notes. I once saw an options exercise written by hand, scanned, and attached to an email.

What you probably have

If you work at a private startup or biotech company, you probably have stock options.

Options give you the right to buy shares later at a fixed price, called the strike price. If the company becomes much more valuable over time, that fixed price can look brilliant in retrospect. You get to buy the shares at that original strike for the entire length of your grant, typically ten years, sometimes five.

That is the fantasy everyone is sold: buy your options cheap now and get rich later, once we develop our product, or once we blow past our competitor.

But options are only valuable if the company eventually has a real liquidity event. That means the company is either sold or lists itself on a market where the public can buy and sell small stakes of ownership (called shares). When many people want to buy the company, the price goes up. When it isn’t doing well, the price often goes down.

And before you get there, you need to know what kind of options you have.

ISOs and NSOs, unfortunately

You’re going to hear two acronyms over and over: ISOs and NSOs.

ISOs, or Incentive Stock Options, are reserved for employees and come with the possibility of better tax treatment if you follow the rules.

NSOs, or Non-Qualified Stock Options, are more flexible and simpler in some ways, but they usually create ordinary income when you exercise them. NSOs can also be offered to contractors, so pay attention if you do consulting work for brands. I know a lot of you do.

That’s the basic explanation.

The more useful explanation: ISOs can be tax-efficient, but they come with more planning landmines. NSOs are often more straightforward, but usually more expensive from a tax perspective. Neither is inherently better. They just create different tax outcomes.

Early exercise, or as I like to call it: paying real money for imaginary money

One of the most important concepts in private company equity is early exercise.

Early exercise means buying your options before they are fully vested, usually when the company is still young, and the share price is still low.

Why would anyone do that?

Because if the company is early enough, the gap between your strike price and the current fair market value might be tiny. That means you may be able to start the capital gains clock earlier, and in some cases, position yourself for a much better tax outcome later. If your shares cost a few cents and you buy them and hold them for more than a year (likely, since there is no public market to sell on yet), you get to pay the lower long-term capital gains rate instead of the ordinary income tax rate.

Quick refresher: the top long-term capital gains rate is 23.8%. The top ordinary income tax rate is 37%. That delta matters.

Picture this. You get granted 10,000 options at a strike price of 5 cents per share. The current fair market value is 6 cents. You write a check for $500, exercise the shares, and start the clock. Five years later the company sells for $50 a share. Your gain is taxed at long-term capital gains rates instead of being treated as ordinary compensation. If QSBS rules line up (more on that in a minute), you could potentially pay $0 tax. Yes, you read that right. ZERO TAX. Remember kids, it takes money to make money and not pay taxes on it.

This is one reason early employees can end up with spectacular results. They exercised when shares were cheap, held on, and a huge chunk of the upside got taxed favorably.

Lovely in theory.

In practice, early exercise means using your actual cash to buy shares in a private company you cannot easily sell, may not understand all that well, and might never see succeed. You are taking concentration risk, liquidity risk, and tax risk all at once.

Sometimes that’s smart. Sometimes it’s a bet that doesn’t pay off. The point is that it is a decision you have to make, and timing matters.

If you have ISOs and exercising would cost you less than 10% of your investable net worth (add up all your cash and investments), it’s worth talking to a financial planner or CPA about modeling out some scenarios. Waiting is what’s expensive.

QSBS, or, how I escape paying tax on $10 million+

Then there’s QSBS, or Qualified Small Business Stock, a tax code that truly feels too good to be true.

For good reason.

If you qualify, QSBS can allow you to exclude a huge amount of gain from federal capital gains tax when you eventually sell the shares. Not trim the tax bill a bit, but potentially wipe out a very large chunk of it.

This is why people get intense about exercising early and where the path splits: those who exercise early may have dramatically better outcomes than those who wait.

If you exercise options early enough and convert them into stock while the company still qualifies, you may be able to start the five-year holding period for QSBS sooner. If the company succeeds and all the rules line up, the tax savings can be massive.

But this is where people get themselves into trouble. They hear “tax-free gains” and immediately lose all skepticism.

A tax benefit does not make a bad asset good.

I cannot stress this enough. You do not get bonus points for perfectly optimizing shares that never become liquid. QSBS matters. A lot. It is also not a reason to risk your entire life savings on a company with a leadership team that looks like the Mighty Ducks starting lineup.

The question nobody wants to ask

What if I leave?

Private company equity gets much more annoying the second you stop working there.

Many stock option plans give employees a short window to exercise vested options after leaving: it’s 90 days. Which means you can go from “I have equity” to “I need to come up with $200,000 in three months or lose it” very quickly.

This is one of the nastiest surprises in equity compensation. So if you work at a private company and have options, you need to know now, not later, what happens if you leave. How long is your exercise window? Can the company extend it? What would it cost to exercise? What would the tax bill look like? Do you even want that much exposure to one illiquid asset?

Romanticizing startup equity is easy when you still work there and you have the ability to wait and see.

It gets less romantic when you’re unemployed and forced to make a very expensive decision on a very tight deadline.

Tender offers, also known as actual money

Let’s talk about tender offers, because this is where private company equity occasionally becomes useful in a very old-fashioned way.

A tender offer is an opportunity for existing shareholders, often employees and early investors, to sell some of their shares at a set price while the company is still private.

This matters because companies are staying private longer. Employees can spend years accumulating equity with no IPO in sight and no realistic way to turn any of it into cash. At some point, the company may decide it needs to provide some liquidity so people don’t leave for jobs where the stock is easier to value and easier to sell.

Usually you cannot sell everything. Often the company limits how much you can sell, maybe 10% or 20% of your holdings. But even partial liquidity can matter a lot.

It can fund a down payment. It can pay off debt. It can let you diversify. It can give you money, which remains one of the more useful forms of compensation.

I am generally in favor of employees participating in tender offers, especially if they’ve been at the company for years and a big chunk of their net worth is trapped in one private stock position.

The tax consequences on a tender offer do matter, yes. They always matter. That should not automatically stop you. One argument I hear often is: Well, I don’t want to sell any of my equity because it may be much more valuable later. Sure, potentially. But if you have the opportunity to still keep 80% of your equity (because you sold 20%), and get some actual dollars now, that’s a pretty good risk to take. 20% at a lower price is a lot better than $0.

The point

Private company equity is not the kind of compensation you can afford to deal with later.

If you have it, you need to understand what you own, what decisions are available to you now, and in the future. You do not need to become an expert, but you should probably hire one, sooner, rather than later. You do need to stop treating this like a weird side pocket of your compensation that will somehow sort itself out.

It won’t.

And if all of this sounds like a giant pain in the ass, that’s because it is. This is one of the few areas in personal finance where doing nothing is often a very active choice.

Sometimes the right move is to learn enough to ask better questions. The even better move is to hire someone who already understands how the exercise decision, the tax implications, the tender offer, and the liquidity timeline all fit together.

Either way, less magical thinking, more actual planning.