Managing OpenAI Equity & Future Wealth

  As OpenAI continues to shape the future of our world, I have begun to hear from OpenAI staff who are seeking to effectively navigate realized liquidity and develop a plan for their wealth. I would like to briefly offer eleven general tools and strategies that can help you as an OpenAI employee purposefully manage your wealth and avoid costly pitfalls.

1. Manage your cash strategically. The failures of banks such as First Republic and Silicon Valley Bank have highlighted the importance of effective cash management. Firstly, ensure that you do not hold more than the FDIC deposit insurance limit of $250,000 in any one bank account. Secondly, make sure that your cash is held in an account that offers a competitive interest rate. Options such as Treasury notes, CDs, municipal bonds, or high-interest-rate savings accounts can serve as effective tools. With current inflation and interest rates where they are, leaving cash in accounts earning minimal interest incurs a significant opportunity cost. High-yield savings accounts and CDs are paying +/-4%. That is effectively $40,000 of lost income on every $1M you leave in cash over twelve months. Here’s a full article on strategies for holding large cash positions strategically.

2. Invest your profits in a diversified evidence-based portfolio. Align your investment portfolio with your liquidity needs, future goals, and investment best practices. Consider working with a financial advisor who commits to being a fiduciary, meaning they are legally obligated to make recommendations in your best interest. Look for an advisor who not only pitches a strategy but also serves as an educational thought partner, helping you understand and implement research-based principles in your portfolio. If a strategy highlights recent short-term returns or claims to consistently beat the market by a specific percentage, exercise skepticism.

3. Invest tax efficiently. Explore tax-efficient investment vehicles such as index funds or tax-managed funds that aim to minimize taxable capital gains distributions and dividends, allowing you to keep more of your investment gains. Consider utilizing state-specific municipal bond funds that will serve to provide tax-free income on the Federal and State levels.

4. Be equity tax-informed: Understand how various types of equity are taxed to maximize after-tax value.

For example, incentive stock options (ISOs) are taxed upon exercise in the form of AMT, then taxed again when sold. Non-qualified stock options (NSOs) are taxed upon exercise as ordinary income and then taxed when sold if there is an additional gain. Restricted Stock Units are typically taxed only after a company goes public, and then taxed as ordinary income upon vesting. Restricted stock is usually taxed at the initial purchase (through an 83b election), and then taxed again as long-term capital gains when sold.

The complexity of taxation rules often leads to confusion regarding double taxation. However, proper handling, including the use of AMT credits and accurate tracking of exercise and sale prices, can help avoid this issue. Consider working closely with an advisor and CPA who can ensure the accuracy of your tax returns. One of the focuses of San Francisco Wealth Planning is to help our clients with tax planning and understanding the implications and the ‘why’s’ behind their tax returns.

5. Consider using liquidity as an opportunity to exercise vested Incentive Stock Options (ISOs). A significant sale of private shares may create an optimal time to exercise stock for two reasons. Firstly, the proceeds provide the necessary liquidity to exercise shares. Secondly, the higher your income and associated ordinary tax bill in any given year, the more room you create for exercising options while minimizing Federal and State alternative minimum tax.

6. Take advantage of the Qualified Small Business Stock tax treatment, if available. If you acquired your initial equity while the company’s gross assets were less than $50 million, then your first $10 million of capital gains may be eligible for tax-free treatment.

7. Utilize trusts to move equity out of your estate and minimize estate taxes. Collaborate with a financial planner and estate planning attorney who specializes in tax planning and wealth transfer for individuals with significant equity. A financial planner can assist you in establishing long-term wealth goals and work alongside an estate planning attorney to ensure that your equity and after-tax sales proceeds are appropriately placed in trusts, optimizing your generational tax savings and current liquidity needs.

8. Use philanthropic tools to minimize taxes. Avoid income taxes by utilizing a Donor Advised Fund for future charitable giving. A Donor Advised Fund allows you to separate the tax benefit of charitable giving from the actual gift. By contributing stock proceeds to a DAF, you can take the tax write-off in your highest tax years while deciding which charities will ultimately benefit from your gifts later on.

9. Recognize capital losses in your taxable investment portfolio to offset OpenAI capital gains. By selling positions in your investment portfolio apart from your equity, you can offset some portion of your private stock's capital gains. Capital losses can be carried forward from year to year, making it important to have a knowledgeable tax advisor. Ideally, you should "collect" or tax-loss harvest your losses in years when the markets are down (e.g., 2022, 2023), and then use those gains to minimize your tax bill when you sell significant stock.

10. Decide how much is ‘enough’ strategically. Collaborate with a financial planner to determine the amount of wealth that creates your full financial freedom and plan for the long term by developing a comprehensive financial plan. Engaging in a comprehensive cash-flow analysis and future projections with a financial planner can provide valuable context not only for deciding what to do with equity proceeds but also for aligning your wealth with what brings you joy and fulfillment. Doing so can also help create the context for developing a plan for future liquidity and the decision of how much OpenAI stock to hold for the long term.

11. Manage risk through appropriate insurance coverage. As your wealth increases, risk management becomes a core component of maintaining your wealth. Specialized liability insurance, along with increasingly robust property, casualty, and home insurance may be relevant to protect your wealth and mitigate potential financial risks.

Looking for help?

Are you looking for a thought partner and resource? If you find that time is your most limited resource and managing taxes, investment planning, charitable giving, and aligning your money with your life goals is a lot to take on, we are here to provide guidance and support. We’re happy to connect to see if working together might be a good fit.