Snowflake IPO: Prepare for the First Release in December
The Snowflake IPO is the largest software IPO ever. And SNOW has surged after its debut on September 16, 2020. Six weeks after the September 16, 2020 IPO, the $251 stock price is still significantly above the $120 IPO price (12/7/2020 note: the stock price is now at $389!). If you work for Snowflake, congratulations! This windfall is exciting and potentially overwhelming.
You’re currently in a lock-up period, the waiting period after the 9/16/2020 IPO during which company insiders like yourself are forbidden from selling SNOW shares.
A lock-up period typically lasts six months. But Snowflake has two lock-up dates, giving you an early chance to benefit from the IPO.
- First Release on December 15, 2020: you can sell 25%.
- Lock-Up Release in March 2021: you can sell all remaining shares.
Over the next several weeks, I will be writing a series of articles for Snowflake employees on the impact of the IPO on your personal finances. Today’s article is about the “First Release” coming up in December.
“First Release” in December
According to Snowflake’s S-1 filing, you’ll be able to sell 25% on December 15, 2020. This will be 25% of each of the following:
- Vested stock options.
- Shares acquired from exercising stock options before the IPO.
Vested Stock Options
Snowflake granted Incentive Stock Options (ISOs) to employees. You may have multiple ISO grants after your new hire grant.
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 exercise (buy) these vested options at a fixed price (strike price).
You can further categorize vested stock options as either:
- Options exercised (refer to the next section, “Shares Acquired From Exercising Stock Options Before the IPO”)
In December, you’ll be allowed to exercise 25% of the Exercisable options.
Types of Vesting Schedules
The most common vesting schedule for new hire grants is four years, with 25% vesting after one full year, and the remaining 75% vesting every month or quarter thereafter. But your refresher grants likely follow a different vesting schedule. Instead of having to wait one year for the first 25%, 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.
Look at each Grant Agreement or log into Solium to get the details.
Shares Acquired From Exercising Stock Options Before the IPO
Snowflake granted Incentive Stock Options (ISOs) to employees. The strike price of your ISO grant(s) 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. The growth in Snowflake’s value from 409A valuations as recently as early 2020 has been stunning.
If you exercised some of your ISOs while Snowflake was still private, your Solium statement will show shares (“Common” Shares) acquired from the ISO exercises.
In December, you’ll be allowed to exercise 25% of the shares acquired from ISOs exercised before the IPO.
Note: new hires at Snowflake are likely only receiving Restricted Stock Units (RSUs). I’ve never seen new ISO grants issued at 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 twice:
- Under the regular rules
- Under the 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 do-it-yourself with TurboTax, the tax return is running both calculations every year.
If you exercise ISOs in 2020 and keep the shares past 12/31/2020, 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 in December at a significant long-term capital gain, this may also push you into AMT territory.
At the very least, speak with a tax professional before the First Release on December 15, 2020 to run a tax projection.
Paying for Taxes Due April 15, 2021
If you read this article in 2021 and are in a panic because you have a large tax bill due on April 15th, not to worry. You still have another opportunity to raise cash when the full lockup comes off in March 2021.
Note: filing for a tax extension only delays the filing due date of your tax return. The payment due date is always April 15th.
How to Decide What to do With the Shares
If you exercise 25% of your vested ISOs in December, you’ll need to decide whether to hold or sell the resulting shares. And if you exercised ISOs before the IPO, you’ll need to decide whether to hold or sell those shares.
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)
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.
To learn more about the Snowflake IPO, here are my other posts in this series
- Blessings (and Burdens) of a Financial Windfall
- Donating Snowflake Stock: Help Charities, and Benefit Financially
- Snowflake Incentive Stock Options
- Snowflake’s Lock-up is Ending: Prepare for an Emotional Roller Coaster
- Snowflake RSUs
- Which Financial Professional Should You Hire?
- Prepare for the Full Release in March 2021