Snowflake IPO: Prepare for Lockup Ending March 5, 2021

Posted 03/02/2021

The Snowflake IPO is the largest software IPO ever. After pricing its IPO at $120, the stock price has surged. You may have sold 25% of your shares during the December window. Another important date approaches: on March 5, 2021, you will be able to sell all of your SNOW shares.

What You Can Sell on March 5, 2021

You’ll be able to sell 100% of the following:

Vested stock options
Shares acquired from exercising stock options

Vested Stock Options

If you joined Snowflake pre-IPO, you received Incentive Stock Options (ISOs) when you were hired. And you may have received subsequent “refresher” grants.

Stock options are either “vested” or “unvested / outstanding.” Each ISO grant’s vesting schedule defines how much time must elapse before you’re allowed to exercise. Once the required amount of time has elapsed, a pre-defined number options are vested, and you can then exercise (buy) these vested options at a fixed price (strike price).

You can further categorize vested stock options as either:

Exercisable, or
Options exercised (refer to the next section, “Shares Acquired From Exercising Stock Options”)

Snowflake employees can exercise vested options during the lockup period. But you can’t sell the resulting shares until the lockup expires.

Types of Vesting Schedules

The most common vesting schedule for new hire grants is four years. 25% vests after one full year, and the remaining 75% vests every month or quarter thereafter.

But your refresher grants likely follows a different vesting schedule. The refresher grant may start vesting immediately. The frequency may be monthly or quarterly. Other grants may have vesting schedules contingent on attaining a specific number of service years at Snowflake, and then vest over two years.

Log into Fidelity to see which vesting schedule applies per grant.

Shares Acquired From Exercising Stock Options

If you’ve already exercised your ISOs, your purchase price (strike price) was based on the company’s 409A valuation on the grant date. The 409A valuation, also known as the Fair Market Value (FMV), represented the “stock price” of Snowflake when it was a private company.

If you exercised some of your ISOs while Snowflake was still private, your Fidelity statement will show shares (“Common” Shares) acquired from the ISO exercises.

Note: new hires at Snowflake are likely only receiving Restricted Stock Units (RSUs). Stock options are rarely granted by public companies.

Watch Out for Taxes

AMT: Alternative Minimum Tax

A potential landmine for ISOs is AMT. The Alternative Minimum Tax (AMT) rules are complicated. In a nutshell, you must calculate your tax bill based on:

The regular rules, and
AMT’s special rules

Each year, you must pay either your regular tax liability or your AMT liability, whichever is greater. Whether you have a CPA or use TurboTax, the tax return is running both calculations every year.

If you exercise ISOs in 2021 and keep the shares past 12/31/2021, the spread (stock price on the day of exercise minus the strike price) isn’t subject to regular income taxes, but it counts as income under the AMT system. This may push you into AMT territory.

If you previously exercised ISOs and sell those shares at a significant long-term capital gain, this may also push you into AMT territory.

At the very least, speak with a tax professional ASAP to run a tax projection.

Paying for Taxes Due April 15, 2021

If you’re worried that your 2020 tax return will lead to a large tax bill, and you don’t have a lot of cash, rest assured. You can raise cash by selling shares in March 2021 when the lockup expires.

When it comes to complicated tax situations like stock options and selling significant amounts of stock, calling in a financial professional is a wise move.

Note: filing for a tax extension only delays the filing due date of your tax return. The payment due date is always April 15th.

Decide What to do With the Stock Options and Shares

You must make three decisions with your stock options:

When to exercise the stock options, and
Whether to hold or sell the resulting Snowflake stock
What to do with the cash if you sell (save, invest…)

When to Exercise ISOs

First, you need to determine if you have enough cash to exercise the options. If you have 10,000 vested options at $0.25 strike price, you’ll need $2,500 cash to exercise the options. At a strike price of $8, you’ll have to cough up $80,000, which is a significant amount of cash for most people.

If you don’t have the cash to pay the exercise cost out-of-pocket, wait for the March 2021 trading window. You can sell shares to pay for the exercise cost.

Next, if the profit built into your stock options is a significant portion of your net worth, this is a good time to examine exercising your ISOs. Given the runaway growth in Snowflake’s stock price post-IPO, your stock option wealth likely represents the majority of your net worth.

When to Sell the Resulting Snowflake Stocks

Once you exercise ISOs, you’ll need to decide whether to hold or sell the resulting shares, which is a complex decision for ISOs. This is because of the tax benefits of “qualifying dispositions” of ISO shares where you get a tax break if you meet two special holding periods.

The best way to make this decision is to let your goals determine how much to sell of your SNOW shares. A financial planner can provide context by helping you articulate your values and goals, and running a long-term financial projection to compare:

What you want to achieve (take a sabbatical, downshift to a less stressful job, buy a house, donate to important causes, help family/friends…), versus
What you have (e.g., your current and future savings)

What to do with the Cash if you Sell

Taxes are an important component of your decision-making. But beware of letting the “tax tail wag the economic dog.” I believe that your short-term and long-term goals, as well as your tolerance for risk, should be the main drivers of deciding whether to keep some/none/all of the SNOW shares. My clients’ goals commonly include:

Down payment on a house
Saving for their children’s tuition
Taking a sabbatical
Switching careers (lower pay for lower stress)

To learn more about the Snowflake IPO, here are my other posts in this series

IF YOU’RE A SNOWFLAKE EMPLOYEE, SCHEDULE A CONSULTATION IF YOU’RE LOOKING FOR A TAX-FOCUSED FINANCIAL PLANNER WHO SPECIALIZES IN EQUITY COMPENSATION.

Jane Yoo

Jane Yoo, CFP®, MBA, is an Oakland, CA fee-only financial advisor. Jane Financial provides comprehensive financial planning and investment management to Superstar Women in Tech who need help with their stock options and RSUs. The typical Jane Financial client is a high-performing Gen X or Millennial woman whose company has an imminent or recent IPO. Jane Yoo serves the wider Bay Area, including San Francisco, San Jose, and Berkeley. As a fee-only, fiduciary, and independent financial advisor, Jane Yoo is never paid a commission of any kind, and has a legal obligation to provide unbiased and trustworthy financial advice.