Introduction
The equity you hold in the company you built may represent years of effort, risk, and sacrifice. And when the time for a liquidity event arrives — whether an initial public offering (IPO), acquisition, or tender offer — the decisions you made years before that moment may determine how much of your hard-earned wealth you keep.
Preliquidity planning is the process of coordinating your tax, estate, and investment strategies before a liquidity event closes. To take advantage of one of the most effective strategies, from qualified small business stock (QSBS) eligibility to trust funding, we recommend establishing them before the deal, especially because some can require years of lead time. If you’re a founder and wait until the money is in your pocket, you may find that the most effective tax-saving and wealth-transfer opportunities are no longer available.
This guide walks through a five-year preliquidity planning timeline, from the foundational steps you can take five years out through the strategies to consider implementing in the final six months before your event.
Five Years Out: Establishing Your Foundation
The qualified small business stock (QSBS) exclusion under Section 1202 of the Internal Revenue Code is one of the most valuable tax benefits available to business owners. For stock issued after July 4, 2025, the per-taxpayer exclusion is $15 million, and the holding period is tiered: 50% exclusion at three years, 75% at four years, and 100% at five years.¹ The gross asset limit is $75 million.²
The five-year holding period for the full exclusion starts at stock acquisition, not at the liquidity event. If you wait until the initial public offering (IPO) to exercise options, the clock restarts, and you may need to hold shares for an additional five years before the exclusion applies. Confirming eligibility early and exercising when valuations are still low may help reduce both your tax exposure and the cost of future preliquidity planning.
Five years out is also a good time to review your estate plan and consider beginning to move future appreciation out of your taxable estate. Gifting shares to family or trusts when your company’s valuation is still modest uses less of your lifetime gift tax exemption and can transfer more future growth to beneficiaries tax-free. This early gifting may be a high-leverage move in your preliquidity planning timeline. The difference between gifting at a low valuation versus a high one can be dramatic — the same shares cost far less in exemption at the lower valuation while transferring the same future appreciation.
A Mercer Advisors wealth advisor can serve as the coordinator, helping ensure that each decision supports your broader financial picture rather than operating in isolation. Building this team five years out gives you the runway to develop and refine your strategy before the pressure of a deal timeline.
Three to Two Years Out: Trust Structures and State Residency
With two to three years before a liquidity event, you have enough time to establish trust structures that can help transfer appreciation out of your estate.
The following specialized irrevocable trust types serve different purposes:
- Intentionally defective grantor trusts (IDGTs) remove future appreciation from your estate , often paired with a promissory note sale that freezes asset value for estate tax purposes.
- Grantor retained annuity trusts (GRATs) transfer appreciating shares at minimal gift-tax cost; if you survive the GRAT term, posttransfer appreciation passes to beneficiaries tax-free.
- Spousal lifetime access trusts (SLATs), funded with pre-initial public offering (IPO) equity at low valuations, move future appreciation into a trust while preserving indirect access through your spouse.
The key is to fund these structures while valuations are still low, before a liquidity event makes the cost of gift tax prohibitive.
Preliquidity planning at this stage also involves evaluating your state residency, which may be one of the largest single tax variables in a liquidity event. Moving from a high-tax state to one with no state income tax before a sale could save a meaningful percentage of your proceeds. However, residency changes require genuine move efforts — establishing domicile, spending time in the new state, and severing ties with the old one. If possible, consider starting this process two to three years out, because states may challenge residency changes that occur too close to a liquidity event.
A qualified small business stock (QSBS) stacking strategy may also come into focus at this stage. When you gift qualified shares to multiple nongrantor trusts, each trust can qualify as a separate taxpayer for the Section 1202 exclusion. For stock issued after July 4, 2025, each taxpayer may exclude up to $15 million. A founder who stacks across several trusts may shelter more gain than the individual cap allows. This strategy requires proper trust structure and timing before a signed letter of intent or IPO.
Mercer Advisors offers strategies for trust and tax planning to clients as part of a comprehensive wealth management solution that also includes financial planning, investment management, estate planning, and insurance solutions.
Two Years Out: Presale Entity Restructuring
If your company is structured as an S corporation or LLC, an F-reorganization — governed by Section 368(a)(1)(F) of the Internal Revenue Code — or entity restructuring may be necessary to preserve qualified small business stock (QSBS) eligibility or optimize the tax treatment of your sale. These structural changes take time to implement and require coordination with your company’s legal counsel. Two years out typically gives you enough time to complete restructuring without rushing decisions under a deal timeline.
This is also the time to review your equity pay strategy. Exercising incentive stock options (ISOs) early starts the holding period for long-term capital gains treatment and may reduce alternative minimum tax (AMT) exposure. The One Big Beautiful Bill Act (OBBBA) of 2025 changed AMT exemption phaseout thresholds, so what produced manageable AMT in prior years may generate higher liability now. Modeling your AMT exposure before exercising may help you avoid surprises.
Preliquidity planning at the two-year mark also means reviewing your concentrated position. If most of your net worth is tied up in a single company’s stock, you may face concentration risk that diversification can address — but only if you plan the diversification strategy before the liquidity event, not after.
At Mercer Advisors, we have wealth advisors who are experienced business planning professionals and help our clients take steps as they plan for liquidity.
One Year Out: 10b5-1 Plan Setup
As a company insider, you’re subject to Securities and Exchange Commission (SEC) insider trading rules. A Rule 10b5-1 plan provides a legal framework by establishing a written, preset trading plan when you don’t have material nonpublic information.3 These plans let you sell shares in an orderly manner after the lockup expires, even during closed trading windows.
A 10b5-1 plan allows executives to preschedule stock sales, enabling them to divest shares while adhering to SEC regulations.
Establish your 10b5-1 plan at least one year before your liquidity event. The SEC amended Rule 10b5-1 to require a cooling-off period, so plans established too close to a transaction may face additional scrutiny. A well-structured plan coordinates with your trust funding and gifting strategies — for example, prescheduling sales with proceeds directed to fund planned gifts to a grantor retained annuity trust (GRAT) or charitable vehicle.
Preliquidity planning at the one-year mark also involves building your tax reserve. When your company goes public, double-trigger restricted stock unit (RSU) vesting can generate massive W-2 income in a single year, pushing your marginal rate to the top federal income tax bracket. Maybe the company withholds at the supplemental rate of 22% but your actual tax rate is 37% or higher. Building a tax reserve before the initial public offering (IPO) helps ensure you can cover the gap without having to sell shares at an unfavorable price.
Mercer Advisors can help you avoid making decisions that result in unexpected or hefty tax bills related to equity planning.
Six Months Out: Charitable Pre-Exit Strategies
Six months before your liquidity event offers a window for implementing charitable strategies. Gifting shares to a donor-advised fund (DAF) or charitable remainder trust (CRT) before a sale may generate a current charitable deduction and reduce the taxable gain on your position. If you have a significant amount of appreciated stock, a CRT may provide an income stream while removing the asset from your estate. The timing matters: Charitable gifts of appreciated stock must occur before the sale to qualify for the deduction at the presale fair market value.
Preliquidity planning at the six-month mark is also when you might finalize your postexit diversification strategy. A diversification glide path — a planned, staged reduction of your concentrated position over time — helps reduce concentration risk while managing tax impact. Your 10b5-1 plan coordinates with this glide path, enabling orderly sales that align with your broader financial plan.
Consider whether hedging strategies, such as collars or prepaid variable forward contracts, are appropriate for your situation. These tools require meaningful lead time to design and implement, so starting at the six-month mark may give you enough time.
Our wealth advisors and specialists know the details of CRTs. They can help you decide if setting one up will improve your tax situation or match your values.
At the Event: Lockup Planning and Postexit Diversification
When your company goes public, a lockup period — typically 90 to 180 days — prevents you from selling shares immediately. You cannot sell during lockup, but you may owe tax on restricted stock unit (RSU) vests or option exercises that occur during this window. Build a tax reserve before the initial public offering (IPO) so you’re not caught off guard. After the lockup expires, your concentrated stock position may represent a risk to your financial well-being.
If you haven’t already initiated a postexit diversification glide path alongside a 10b5-1 plan, consider implementing at this time. Portfolio diversification isn’t just about reducing risk. It is also about creating a portfolio that supports your goals — funding your lifestyle, supporting your family, and building toward whatever comes next.
Mercer Advisors can help guide your decisions to turn uncertainty about the right strategies for your situation into lasting value.
Conclusion
Preliquidity planning is not simply a checklist you complete in the weeks before a deal closes. It is a multiyear process that coordinates tax, estate, and investment decisions across your entire financial picture. The founders who keep the most from a liquidity event are usually the ones who start planning years before the deal is signed.
Whether your liquidity event is five years out or five months out, the time to start preliquidity planning is now.
FAQs
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Preliquidity planning is the coordinated process of arranging your tax, estate, and investment strategies before a liquidity event, such as an initial public offering (IPO) or acquisition, closes. It matters because valuable strategies are available — from qualified small business stock (QSBS) eligibility to trust funding — that you can establish before the deal, and some require years of lead time. Founders who plan ahead may keep more of their proceeds than those who wait until the money is real.
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Qualified small business stock (QSBS) stacking multiplies the Section 1202 gain exclusion by gifting qualified shares to multiple nongrantor trusts, each of which qualifies as a separate taxpayer for the exclusion. For stock issued after July 4, 2025, each taxpayer may exclude up to $15 million. A founder who stacks across several trusts may shelter more gain than the individual cap allows. This strategy requires proper trust structure and timing before a signed letter of intent or initial public offering (IPO).
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Starting early is one of the most impactful decisions you can make. Strategies such as qualified small business stock (QSBS) eligibility, trust funding, and state residency changes typically require years to implement properly. Waiting until the deal is signed often means that powerful tax-saving and wealth-transfer opportunities may no longer be available. Even if your exit timeline is uncertain, beginning the planning process now helps give you flexibility you can’t recover later.
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A 10b5-1 plan is essential if you plan to sell shares after the lockup period. As a company insider, you’re subject to Securities and Exchange Commission (SEC) insider trading rules that restrict when you can trade. A 10b5-1 plan provides a legal framework by establishing a preset trading plan when you don’t have material nonpublic information. Establishing the plan at least a year before your liquidity event helps you avoid complications from cooling-off periods and coordinates with your broader diversification strategy.
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Mercer Advisors has dedicated teams experienced in helping tech professionals and executives navigate preliquidity decisions. Our wealth advisors and specialists understand the startup lifecycle, equity pay structures, and the specific tax and estate planning strategies that apply before a liquidity event. We offer a complimentary consultation for discussing your timeline.
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Qualified small business stock (QSBS) eligibility depends on several factors: The company must be a domestic C corporation with gross assets under $75 million at the time the stock is issued, and the stock must be held for at least three years for a partial exclusion or five years for the full exclusion. A qualified tax professional or wealth advisor can review your cap table, stock purchase dates, and company financials to confirm whether your shares qualify under Section 1202.
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An intentionally defective grantor trust (IDGT) removes future appreciation from your estate entirely, often paired with a promissory note sale that freezes the asset’s value for estate tax purposes. A grantor retained annuity trust (GRAT), by contrast, transfers appreciating shares at minimal gift-tax cost while you receive annuity payments back over a set term; if you survive the term, the remaining appreciation passes to beneficiaries tax-free. IDGTs are better for removing large amounts of future growth, while GRATs suit founders who want to retain some economic benefit during the trust term.
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Both strategies serve different purposes and often complement each other rather than compete. Charitable vehicles such as donor-advised funds and charitable remainder trusts generate immediate deductions and reduce taxable gain on appreciated stock. Trusts such as intentionally defective grantor trusts (IDGTs) and spousal lifetime access trusts (SLATs) focus on transferring future appreciation to beneficiaries outside your taxable estate. The right approach depends on your philanthropic goals, family situation, and timeline, and many founders can benefit from using both in coordination.
1“Sec. 1202 Partial Exclusion for Gain From Certain Small Business Stock.” TaxNotes, 2026.
2“Sec. 1202 Partial Exclusion for Gain From Certain Small Business Stock.” TaxNotes, 2026.
3“Rule 10b5-1 Trading Plan Guidelines: A Survey of the SV150.” Harvard Law School Forum on Corporate Governance, Dec. 11, 2025.
All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change. Some of the research and ratings shown in this presentation come from third parties that are not affiliated with Mercer Advisors. The information is believed to be accurate but is not guaranteed or warranted by Mercer Advisors. Content, research, tools and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. All investing involves risk, including the possible loss of principal.
Mercer Advisors is not a law firm and does not provide legal advice to clients. All Estate planning document preparation and other legal advice are provided through select third parties, with which Mercer Advisors has a contractual relationship. Tax preparation and filing services are provided by Mercer Advisors Tax Services, LLC. Clients will sign a separate agreement when engaging Mercer Advisors Tax Services that defines the services provided and any additional fees that may apply. Insurance products are provided by Mercer Advisors Insurance Services, LLC (MAIS), which places individual life, disability, long term care coverage, and property and casualty coverage through select insurance companies. Trustee services are offered through select third parties with which a client would sign an additional agreement, and additional fees may apply.
For financial planning advice specific to your circumstances, talk to a qualified professional at Mercer Advisors
