Navigating Stock Options: Strategic Timing for Founders & Employees Facing a Liquidity Event

My interest in Formula 1 recently sparked back up, just in time for the 2025 season kickoff on March 16th. What fascinates me most is how teams navigate each Grand Prix weekend—balancing car setup, tire strategy, and split-second decisions under rapidly changing conditions.

Success isn’t just about raw speed; it’s about knowing when to push, when to hold back, and how to maximize every opportunity.

The same principles apply to late-stage startup employees and founders preparing for a liquidity event. Just as an F1 team must optimize performance across a race weekend, those facing an IPO, acquisition, or secondary sale need to strategically manage their stock options, tax implications, and financial future. Timing, risk management, and methodical planning can be the difference between long-term financial security and costly missteps.

If you’re approaching a liquidity event, here are key strategies to help ensure you cross the finish line with confidence.

1. Strategic Timing for Exercising Stock Options

Early vs. Late Exercise: The Strategic Balance

Exercising early can be beneficial if your company’s valuation is still relatively low, as this means a lower strike price and potentially lower taxes when you eventually sell the stock. Early exercise also starts the clock on long-term capital gains treatment, allowing you to benefit from lower tax rates when you do sell.

However, this strategy requires upfront cash to purchase shares, and there’s always the risk that the company may not achieve a successful exit, leaving you with illiquid or worthless stock.

On the other hand, waiting to exercise provides more certainty but often comes at a higher cost. If your stock appreciates significantly before a liquidity event, the tax implications of exercising later can be much larger.

One key factor to consider is your expected future tax situation. For example, delaying exercise could yield significant savings if you anticipate moving from a high-tax state like California (13.3% top rate) to a no-income-tax state like Texas or Washington. Conversely, if your income is expected to rise in future years, early exercise might keep you in a lower tax bracket for AMT calculations.

Additionally, consider opportunity cost. Every dollar tied up in exercising options is a dollar not invested elsewhere. Model scenarios comparing option exercise against alternative investments with similar risk profiles. In some cases, maintaining liquidity and investing in a diversified portfolio may outperform early exercise, even with tax advantages.

Company Milestones to Watch

Your timing should align with specific company milestones. Pay attention to:

• 409A Valuation Changes: A lower valuation means a lower tax burden when you exercise. Understanding how your company’s 409A is calculated—whether through comparable company analysis or discounted cash flow projections—can reveal strategic exercise windows.
• Upcoming Funding Rounds: When a company raises a new round of funding, its valuation often increases, leading to higher stock prices and higher taxes if you exercise later.
• Acquisition Talks: If an acquisition is in progress, the acquiring company’s offer structure (cash vs. stock) can affect whether exercising beforehand is beneficial.
• Regulatory Approvals & International Expansion: In industries like healthcare, financial services, or fintech, major regulatory approvals can create an asymmetric upside opportunity. Similarly, expanding into a new market may temporarily pressure financials before revenue materializes, creating a strategic entry point for exercising options.

2. Equity Sale Strategies During a Liquidity Event

Selling vs. Holding: Finding Your Balance

During an IPO or acquisition, deciding whether to sell immediately or hold onto your stock is a crucial financial choice. Selling too soon might mean missing out on significant appreciation, while holding too long exposes you to market volatility and potential downturns.

• Market & Industry Cycles: If your industry is cyclical (e.g., semiconductors, commodities), it may make sense to sell aggressively during peaks. Conversely, for high-growth SaaS or biotech sectors, a more gradual approach aligned with broader industry growth may be preferable.
• Company Competitive Positioning: Holding might be justified if the liquidity event strengthens your company’s competitive position through additional resources or distribution. If key talent tends to depart after liquidity events, selling sooner might be wise.
• Staged Selling for High Equity Holders: Founders and executives with significant ownership stakes should consider a staged selling program that balances diversification with confidence signaling. Retaining 60-70% through the first year post-liquidity, then phasing out over milestones, can optimize risk and market perception.

Liquidity Event Timing Strategies

• Direct Listings vs. Traditional IPOs: Without underwriters stabilizing the price, direct listings tend to have higher post-listing volatility—a three- to four-week waiting period for price discovery before selling may be beneficial.
• SPAC Mergers (Special Purpose Acquisition Company): High redemption rates or weak PIPE investor participation often lead to post-merger instability. Selling within the first three to six months post-merger, when sponsor support is strongest, may be a better move.
• Earnout Structures in Acquisitions: If part of your payout is tied to post-acquisition performance, align your selling strategy with these milestones. Consider selling earlier if early indicators suggest earnout targets may be challenging.

3. Diversification Strategies for Founders & Employees

Mitigating Concentration Risk

Holding too much of your wealth in a single company’s stock—even if it’s your own—can be risky. Many founders and early employees develop strong emotional attachments to their equity, making it difficult to sell. Establishing objective, pre-determined selling triggers based on portfolio concentration percentages, company milestones, or personal financial goals can help overcome this bias.

• Sector Diversification: Founders often reinvest in industries they know, inadvertently maintaining concentration risk. Use the “3-3-3 approach”—invest across three familiar sectors, three adjacent sectors, and three unrelated sectors to help ensure true diversification.
• Structured Sales Plans (10b5-1 Plans): A layered 10b5-1 strategy with multiple overlapping plans—one based on time intervals, another on price targets, and a third on milestone achievements—can optimize execution and reduce risk.

4. Tactical Moves for Minimizing Risk & Maximizing Gains

Tax-Loss Harvesting for Startup Stock

If you have losses from previous investments, you can use them to offset capital gains from selling your startup stock. Multi-year tax planning is key. Work with advisors to model income and capital gains across three- to five-year horizons to identify the best years for harvesting losses or gains.

Using Loans Against Stock Holdings

Rather than selling shares and triggering taxes, some high-net-worth individuals take securities-backed loans against their stock to access liquidity without selling. Private banks often provide customized terms with higher loan-to-value ratios than traditional brokerages.

Hedging Strategies for High-Value Stock Holdings

• Protective Puts & Collars: Buying put options or structuring collars can provide downside protection if you hold significant stock post-IPO.
• Synthetic Hedges for Pre-IPO Employees: Employees can hedge exposure by investing in public competitors, suppliers, or customers with a high correlation to their company’s performance.

Final Thoughts: Integrating Strategy & Execution

In Formula 1, races aren’t won by sheer speed alone—they’re won through careful planning, smart risk management, and executing the right moves at the right time.

The same is true for navigating a liquidity event. By understanding your stock options, optimizing for taxes, and strategically diversifying your investments, you can position yourself for long-term success rather than just a short-term windfall.

Whether you’re in the early laps of planning or approaching the final stretch, making informed, strategic decisions will help ensure that your financial future isn’t left to chance. After all, in both F1 and wealth management, the right strategy can mean the difference between standing on the podium and getting lost in the pack.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.