A Stripe employee’s guide to investing tender offer and secondary proceeds tax-efficiently

Frec is not a tax advisor, and this article is general educational information, not tax advice. Everyone’s tax situation is different, so please consult a qualified tax professional about your own circumstances before making any decisions.

If you work at Stripe, most of your equity has probably been on paper, locked up until a liquidity event. When a tender offer or secondary sale comes around, that paper wealth turns into real cash, often a large amount at once, and you are suddenly making decisions you’ve never had to make before. What do you do with the proceeds, what will you owe in taxes, and what about the shares you still hold?

Here’s how you could think about it.

First, understand the two tax events

A liquidity event can create two very different kinds of tax, and they are easy to conflate.

The first is ordinary income. Many private companies grant double-trigger RSUs, which only vest when two things happen: you hit the time-based vesting schedule, and the company has a liquidity event. When that second trigger fires, the full value of those vested shares is taxed as ordinary income, all in one year. For a long-tenured employee, that can be a large spike, and the company’s default withholding often does not cover the top of your bracket.

The second is capital gains. When you actually sell shares in the tender or secondary market, you owe tax on the appreciation above your cost basis. Whether that gain is taxed at lower long-term rates or higher short-term rates depends on how long you have held the shares, measured from when they vested or when you exercised.

There is also a possible bright spot worth raising with your tax advisor: qualified small business stock. Under Section 1202, stock in certain companies, held long enough and meeting strict requirements, can qualify for a meaningful federal exclusion on the gain. The rules are technical and many employees’ shares will not qualify, especially at larger or later-stage companies, but the potential savings are large enough that it is worth checking.

The reason this matters for what comes next: capital losses offset capital gains, plus a small amount of ordinary income per year. So a tax-aware portfolio can help with the capital-gains side of your liquidity event and with future gains on the money you reinvest. It does not erase the ordinary-income hit from vesting.

What to do with the cash proceeds

Once the cash lands, your goal could be to put it to work in a diversified, tax-efficient way rather than letting it sit or pouring it back into a single stock.

Classic direct indexing, for the proceeds

Frec’s classic direct indexing invests in the individual stocks of an index rather than through an ETF, while aiming to track the benchmark closing and harvest tax losses automatically as individual positions dip. For someone reinvesting liquidity proceeds, that means a diversified portfolio that also generates losses over time. These losses can offset capital gains, including gains from your liquidity event in the same year and gains down the road. You can choose from indices like the S&P 500, which starts at a 0.09% annual fee and has a $20,000 minimum.

Long short direct indexing, for larger proceeds

If you are reinvesting a large sum and have the risk tolerance for it, long short direct indexing is designed to 1) allow you to take a stance on the market and seek pre-tax excess return and 2) harvest more losses than a classic long-only index. It does this with leverage by adding long and short extensions to your index. More harvested losses mean more capacity to offset gains. Leverage increases risk, including the risk of larger losses, there is a financing cost on top of the annual fee, and minimums are higher, starting at $100,000 for the 140/40 strategy and $500,000 for the more aggressive tiers.

Treasury, for cash you have not deployed yet

You don’t have to decide everything at once. Frec Treasury is a place to hold proceeds and earn yield while you plan. It is invested in money market funds holding short-term US government and Treasury securities.

A note on the private shares you still hold

It may be tempting to ask whether you can diversify or borrow against the Stripe shares you did not sell. Usually not, while they are still private. Frec Diversify and a portfolio line of credit both rely on marketable, marginable securities, and illiquid private stock generally cannot be hedged or used as collateral. Those tools become relevant once your shares are publicly traded and not under any restrictions, for example, after an IPO, or for the diversified portfolio you build with your proceeds.

Frec’s exclusive offer for Stripe employees

Frec runs a dedicated program for people who work at Stripe, with current offer details and program terms on the program page. If you have just had a liquidity event or expect one soon, that is the place to start.

See the Frec program for Stripe employees

Frequently asked questions

I just sold in a tender offer. Will direct indexing lower the tax I owe on it? It can help with part of it. Harvested losses can offset the capital-gains portion of your sale and future gains, but they do not offset the ordinary income from vesting, beyond a small amount per year. Your specific situation determines how much it helps, so please consult your tax advisor or CPA.

What is a double-trigger RSU? It is an RSU that vests only after two conditions are met: your time-based vesting schedule and a company liquidity event such as a tender offer, acquisition, or IPO. When the second trigger fires, the value of those shares is taxed as ordinary income, which can create a large tax year.

What about QSBS? I have heard it can save a lot. Possibly, but it is specific. Section 1202 qualified small business stock can carry a meaningful federal exclusion on gains if the stock and the holding period meet strict requirements. Many employees’ shares will not qualify, particularly at larger or later-stage companies. It is worth confirming with a tax advisor rather than assuming either way.

Can I diversify my private Stripe shares before they are liquid? Generally no. Diversify and a portfolio line of credit need marketable, marginable securities, and private shares are neither. Instead, consider diversifying your remaining position once it becomes tradable.

Where should I park the cash while I decide? Frec Treasury is built for that: earn yield on cash you have not yet deployed, with quick access when you are ready to invest.

Important disclosures

This content is educational and is not tax, legal, or investment advice. Tax outcomes from a liquidity event depend heavily on your individual circumstances, including the type of equity you hold, your cost basis, your holding period, and your state of residence. Please consult your tax advisor or CPA. References to qualified small business stock and Section 1202 are general; eligibility is fact-specific and subject to detailed requirements.

Tax-loss harvesting and the tax benefits described here apply to taxable accounts only and do not apply to retirement accounts such as IRAs or 401(k)s. Tax-loss harvesting offsets capital gains and a limited amount of ordinary income per year; it does not offset ordinary income from equity vesting.

Investing involves risk, including the possible loss of principal. Past performance and any hypothetical examples do not guarantee future results. Frec direct indexing and long short direct indexing fees and minimums are stated as of publication and are subject to change; see frec.com/pricing for current terms. Long short direct indexing uses leverage and short positions, which can increase risk, including the risk of amplified losses, and involves a financing cost. A portfolio line of credit involves borrowing on margin, which can increase investing risk; read Frec’s Margin Disclosure before borrowing. Frec Treasury is not a bank deposit, is not FDIC-insured, and yields fluctuate with market conditions.

Fiduciary duty applies to Frec’s direct index and treasury strategies. Frec refers to Frec Markets, Inc., and its wholly owned subsidiaries, Frec Securities LLC (Broker-Dealer, FINRA and SIPC member) and Frec Advisers LLC (Registered Investment Adviser). Frec is only available to US residents. By using frec.com you accept our Terms of Use and Privacy Policy. See our Form CRS for the services and differences between the entities.

Sources and further reading

The general tax and investing concepts in this article are drawn from public, authoritative sources: Carta on single-trigger versus double-trigger RSUs (carta.com/learn/equity/rsu/single-trigger-vs-double-trigger/) and on qualified small business stock and Section 1202 (carta.com/learn/startups/tax-planning/qsbs/); the IRS on capital gains, holding periods, and capital losses (irs.gov/taxtopics/tc409); and the SEC’s investor education on asset allocation and diversification (investor.gov/introduction-investing/getting-started/asset-allocation). For your own situation, consult a qualified tax professional.