According to the Wall Street Journal, as SpaceX is about to go public, the company's employees are scrambling to figure out how to deal with the upcoming huge wealth. A former SpaceX employee has been discussing this with Eric Franklin, a wealth advisor who specializes in working with technology company employees. Based on the IPO price set by SpaceX last week, the former employee's SpaceX stock holdings are worth $21.4 million, accounting for 93% of his family's investable net assets.


SpaceX is about to go public

Franklin advises his clients to gradually reduce their holdings in SpaceX once it goes public. However, the client was hesitant to sell SpaceX stock too soon due to concerns about it. "He clearly still believes this company is extraordinary," said Franklin, co-founder of financial planning firm Prospero Wealth.

With SpaceX about to hit the stock market, the company shares held by thousands of former and current SpaceX employees will soon be able to be converted into life-changing fortunes.The same is true for many who hold shares in Anthropic and OpenAI, two companies that also filed to go public this year.

However, suddenly sitting on huge wealth is not an easy thing. Here are some of the choices SpaceX employees are facing.

Avoid wealth mania

Tara Shulman, a wealth advisor at Compound Planning, a wealth management firm, said a key part of her job is developing a diversification plan and urging clients to follow it rigorously.

“We want to try to avoid clients getting caught up in the kind of emotional frenzy that’s bound to happen after an IPO,” she said. “You’re going to drive yourself crazy trying to find the best time to sell. But there may be a ‘best time to sell’ for you personally.”

She also said selling stocks now could give clients the ability to pay for their children's college tuition, buy a new home, or retire early.


SpaceX valued at $1.77 trillion

Diogo Mónica is a venture capitalist and co-founder of crypto bank Anchorage Digital, who has accumulated significant stakes in several startups during his career. He developed a plan to avoid making rash decisions. He has been adhering to a strategy of selling 20% ​​of his holdings at the IPO and then gradually selling off the other 60%. He chose to hold the remaining 20% ​​for the long term to express his confidence in the company.

Monica, an early employee of Square, a subsidiary of financial technology company Block, sold most of his holdings in Square through the online platform Frec. Frec provides independent investors with tax-considered investment strategies.

SpaceX employees are subject to a 180-day lock-up period, but during certain windows, they have the opportunity to sell some of their shares early.

tax issues

Many SpaceX, Anthropic and OpenAI employees hold a mix of equity compensation, including nonqualified stock options, incentive stock options, restricted stock units and shares in employee stock purchase plans. Bruce Brumberg, co-founder of mystockoptions.com, said each form of tax is treated differently, and one wrong move could mean an unexpected tax bill.

Selling too many shares in a year, or exercising too many nonqualified stock options, could push a taxpayer into a higher tax bracket. Incentive stock options may trigger a substantial and unexpected alternative minimum tax. Therefore, financial advisors often recommend developing a “tax schedule” that spreads option exercises over multiple tax years to reduce the tax impact.

Restricted stock units generate a tax bill when they vest, even if you cannot sell the shares at that time. The default withholding tax rate of 22% may not be sufficient to cover the actual tax burden. "If you take out a loan to pay your tax bill and the stock price drops after the IPO, you still have to pay the tax," said Giovanni Tiso, a certified financial planner at Titan.

Employees can also sometimes acquire additional shares through employee stock purchase plans. The plan typically allows employees to purchase up to $25,000 worth of stock annually at a discount of up to 15%. Employees then had to decide whether to hold on to the shares or sell them as quickly as possible.

Diversified configuration

Asset diversification can be as simple as selling some stocks and investing the proceeds into the S&P 500 Index.

However, there are more advanced strategies. For example, investors can invest funds in "direct indexing investments" and, while tracking index performance, deliberately achieve some losses to offset capital gains, thereby achieving tax optimization.

There are also ways for employees to diversify their wealth without immediately selling stocks and paying taxes. Prepaid forward contracts allow employees to borrow against stock holdings over a certain period of time and use the proceeds to diversify their investment portfolios. Such contracts usually also include a "price spread protection zone" (collar), which sets a floor and ceiling price for the stock, thereby limiting the employee's downside risk and upside. When the contract expires, the employee can sell the shares and pay the tax, or continue the strategy by opening another contract.


Falcon 9

Also popular are exchange-traded funds, which are private investment vehicles that allow investors with concentrated positions in different companies to pool their respective stocks to diversify their portfolios. The IRS generally requires investors to hold an interest in such funds for at least seven years.

In addition, there are 83(b) options granted on stock. The option allows the holder to pay taxes in advance before the equity vests, which can result in huge tax savings if the stock appreciates significantly when it vests. However, if stock prices fall, taxpayers may be paying an early tax that they would not otherwise have to pay.

risk

Even with careful planning, owning company stock always carries risks.

For example, Franklin, a consultant who advises former SpaceX employees, joined Amazon in 1998, just a year before it went public. He was the only person in the company's onboarding class to sell stocks after one year on the job.

When the dot-com crisis hit, the remaining three-quarters of the shares he was granted fell below the exercise price and eventually became worthless.

"Now we all look at Amazon as a huge success story," Franklin said, "but it hasn't always been that way."