Entrepreneurs: Prepare now for future liquidity events

Long before you begin preparing your company for a sale or initial public offering (IPO), we think it’s important to focus on what you want your wealth to accomplish and be aware of all your potential choices for your company holdings.

What is your primary intention for your wealth? Is it to ensure you live a certain lifestyle? Create a community legacy? Steward wealth for the benefit of many generations? Possibly your objective is simply to live well and provide your children with a wonderful start. Different intentions often require unique investing and planning time horizons, along with associated strategies—that’s why it’s so crucial to identify and articulate your intent up front.

Do you have a clear understanding of your company holdings and how best to prepare your personal balance sheet for a future liquidity event? For example: Is your company a U.S. C corporation? If so, what shares do you own outright, and do you have equity incentive awards? If you have stock options, are they nonqualified stock options or qualified incentive stock options (ISOs)? What have you exercised, and when?

Having gathered these facts and reaffirmed your wealth intentions, we recommend considering the following questions. We offer them to help you clarify your choices with respect to your holdings and to solidify a plan to help maximize the contribution your business can make to achieving the goals you have set for your wealth.

10 key pre-liquidity event questions for entrepreneurs

1. Are my shares eligible for qualified small business stock (QSBS) treatment?

The treatment of QSBS is of great interest to entrepreneurs and founders of U.S. C corporations. If applicable, it can reduce the U.S. capital gains tax rate to as low as 0% on your first $15 million of gains. Consult your tax advisor for the specific criteria for qualification. 

2. When should I exercise my options?

Many entrepreneurs exercise options, particularly ISOs, well before the option expiration date. The primary reason for doing this—when there is no or minimal “spread” or discount between the strike price and the fair market value of the private company’s common stock¹—is to start the long-term capital gains clock running on all future share appreciation once the options are exercised.

In certain cases, you may be able to exercise unvested options. Before exercising any options, however, you should (with your accountant) carefully consider the income tax consequences and, at the same time, assess your available liquidity—or access to liquidity—to pay for stock at the strike price plus any tax liability triggered by exercise. Because the QSBS holding period applies to shares rather than options, exercising early can start the clock sooner and allow a future sale to qualify for the exclusion that would otherwise be unavailable.

3. What if I lack liquidity to exercise my options?

If you need liquidity—to exercise options or, for that matter, to buy a house or for another purpose—it may be possible to borrow against private company shares. It is also possible, and often easier, to borrow against liquid portfolio investments and/or residential real estate.

4. Can I sell shares or options in a secondary sale transaction?

By contrast, probate can be avoided by the estate of a deceased individual with a properly funded revocable trust. If you are still young or in the accumulation stage of your wealth, setting up a revocable trust may not seem like a priority. Nevertheless, we believe all entrepreneurs should have a basic revocable trust plan in place.

7. Should I plan to gift shares to an irrevocable trust for family members?

If you are an entrepreneur who has generated more wealth than you will use in your lifetime, we strongly encourage you to gift shares in your company to an irrevocable trust for the benefit of your family. Ideally, this gift should be made while the shares’ fair market value is still low compared to their potential future value. Typically, the beneficiaries of an irrevocable trust are family—children (or future children), siblings, parents or perhaps other relatives. A charity, too, sometimes is a beneficiary.

Assets transferred to an irrevocable trust (and all future appreciation of trust assets) are outside of the taxable estate of the entrepreneur, thereby reducing or eliminating the 40% U.S. gift or estate tax that otherwise can apply to wealth transfers. Private company shares (and sometimes nonqualified stock options—but never ISOs or restricted stock units) are typically transferred to an irrevocable trust by direct gift. The entrepreneur applies some of their lifetime gift tax exclusion against the value of the transfer.

Alternatively, you may want to move shares to a grantor retained annuity trust (GRAT), a commonly used vehicle that enables a gift-tax-free transfer of future appreciation on an asset (above a modest IRS hurdle rate) without using any of your lifetime gift tax exclusion. In 2026, the lifetime gift tax exclusion amount for every individual is $15 million; this amount is adjusted annually for inflation.

8. What if I have already funded an irrevocable trust?

Congratulations on being ahead of the curve! If you have already gifted company shares to a GRAT or other irrevocable trust, there may still be ways to optimize the value of that trust before your company’s IPO or sale.

For instance, is the trust a “grantor trust”—do you, as the creator of the trust, pay taxes on any trust income and gain? Or is it a “non-grantor trust,” where the trust pays taxes on trust income and gain? If it’s a non-grantor trust (or if that is what you desire), it may be possible to move the trust to a state such as Delaware to avoid or defer any state-level income tax on the future sale of company shares owned by the trust.

A trust that pays tax on its income and gain may also be entitled to its own QSBS capital gains tax exclusion of up to $15 million. This is another area where consulting with your tax advisor well in advance of a potential transaction should serve you well.

9. Do I need life insurance?

Term life insurance can be a temporary and inexpensive way to protect against the adverse tax and liquidity effects of an entrepreneur’s unexpected demise prior to a company’s IPO or sale. Life insurance proceeds can be an available source of cash to your estate/family for the purposes of (a) exercising options, and/or (b) paying estate tax on illiquid private company shares included in your taxable estate.

10. Should I be thinking ahead to future charitable giving?

Most entrepreneurs with significant philanthropic objectives will make gifts to charity after an IPO or sale of the company, although in certain situations, an entrepreneur may gift pre-deal private company stock to charity. Timing is important, and it makes sense to help offset a large amount of income (e.g., in the year your company is sold) with a corresponding charitable contribution.

Unlike gifts to family members (where the goal is to give property when the value is still low), gifts to charity are usually made with highly appreciated assets such as post-IPO stock, as the charitable income tax deduction is generally based on the fair market value of the gift. Any embedded appreciation on shares gifted to charity can forever avoid capital gains tax. You may want to establish a donor-advised fund or private foundation as your charitable giving vehicle.

We can help

 At J.P. Morgan Private Bank, we are deeply familiar with entrepreneurs’ financial opportunities and challenges. Reach out to your J.P. Morgan team for thoughtful counsel that can help you address the many dimensions of your financial life.