Figma Adobe Acquisition Planning - Part I - Tax Planning

I’m excited to share the first installment of my guide for Figma staff preparing for the potential Adobe acquisition with a focus on tax planning.

As a Figma employee on the brink of a significant liquidity event, I hope to help you approach this season with a clear understanding of how to prepare for the Figma/Adobe acquisition. Here, I’ll highlight specific considerations for navigating the tax complexity and follow with some thoughts on preparing to sell Adobe stock (Part II).

What if regulators halt the deal?

Before diving into what you can do to prepare for the Adobe merger, let’s take a moment to consider if planning now is still worthwhile if the deal doesn’t finalize.

Collectively, much of the tech world is holding its breath as we follow public news related to the Adobe/Figma transaction and the broader climate for large tech acquisitions. With the Federal Trade Commission's unsuccessful attempt to block Microsoft's acquisition of Activision Blizzard, the Figma merger may draw closer to reality. While immediate liquidity and a high exit valuation would be cause for celebration for Figmates, I think a silver lining remains if the deal doesn’t go through. If the acquisition doesn’t finalize, additional planning strategies will be available, specifically around the timing of the exercise and sale of options that a merger may preclude.

Regardless, the Adobe deal demonstrates Figma's marketplace value and has potentially prepared the public for an in-demand successful IPO. The future is hopeful as inflation slows and publicly traded tech stocks recover. Whether or not the deal is finalized, the following steps will help prepare you for Figma liquidity.

Taxes & Liquidity Decisions

In preparation for the Adobe/Figma merger, your taxes are one of the primary areas you’ll want to get right. I want to share four tax planning considerations (Part I) and thoughts on why and when to sell liquid shares (Part II).

Tax Planning - Understanding Your Equity Types

If you have been receiving Figma equity for several years, the Adobe acquisition will likely place you in the highest federal tax bracket, which starts at $578,125 for single filers and $693,750 for married couples in 2023. Due to our privacy policy and commitment to protecting non-public information, we won’t provide detailed information about the proposed deal here. However, it is crucial for you to know that acquisitions generally accelerate the receipt of taxable income from vested stock options.

Typically, ISOs (Incentive Stock Options) that have been held for over a year from exercise and two years from the grant qualify for preferred long-term capital gains rates. On the other hand, NSOs (Non-Qualified Stock Options), RSUs (Restricted Stock Units), and, in some cases, unexercised options are taxed as ordinary income, like your wage income. Furthermore, early-exercised ISOs have special holding requirements to qualify for long-term capital gains during a merger.

Before the acquisition is finalized, it’s worth taking the time to review the tax ramifications of each of your equity types with a tax advisor to understand how each grant will be taxed and how much you can expect to keep after taxes are paid.

Tax Planning – RSU Under-Withholding

Understanding your tax situation also involves recognizing the possibility of under-withholding taxes at the time of acquisition. Typically, as RSUs vest, a portion of them is sold to cover the resulting tax liability. This sale of shares will appear on your paycheck and in your equity portal. Automatic withholding is often set to the IRS minimum requirement of 22%, but you will likely owe 35% or 37% tax rather than 22%. If this is the case, ensure that you have sufficient cash on hand to cover the additional 13%-15% tax bill and consider paying estimated quarterly taxes. You can do this by selling additional shares or paying taxes out of pocket if you want to retain shares.

Tax Planning - Realizing Capital Losses & Capital Gains

The good news is that while understanding and paying your taxes may be a challenging process, you can take steps to lower your tax bill. Your larger investment portfolio may impact how your Figma liquidity is taxed. Under the current tax system, you can offset capital gains with capital losses. If you hypothetically realize $500,000 of Figma capital gains but also sell investments currently trading at a loss of $100,000, you would effectively only be taxed on $400,000 of Figma capital gains. Additionally, if your capital losses exceed your capital gains, you can offset up to $3,000 of ordinary income each year and carry forward any unused losses. Losses from one year can be carried forward to future years until they are entirely ‘used up’ by offsetting other gains.

Liquidity could push you into the highest tax brackets for both ordinary income and long-term capital gains. At the highest levels, this could bring you 12.3% in CA state tax, 20% in Federal tax, and another 3.8% Medicare surtax. Think strategically about whether selling other stock that holds considerable gains makes sense. For example, if you’ve been holding on to your previous Apple or Google RSUs for the last five years, from a tax perspective, you may want to push those gains into a year separate from the acquisition. If the acquisition were finalized in 2024, 2023 might be the ideal time to sell shares. Alternatively, if the acquisition were to be completed in 2023, you may want to hold onto the shares until 2024 to avoid them being potentially taxed at the highest rates.

Tax Planning - QSBS

The QSBS tax rule is among the best tax breaks in the US tax code. If you were an early Figma team member, a portion of your initial grant may qualify for a 0% capital gains tax rate under Qualified Small Business Stock treatment. This tax exclusion was designed to incentivize investment in small businesses during their early stages. If the total assets of the company at the time you received your initial grant, likely before the Series C round in Figma's case, were under $50M, the first $10 million of your capital gains could be taxed at 0%. As an early employee, it’s worth connecting with the Figma equity team and an experienced tax planner to determine if your shares are eligible for this favorable treatment.

Here’s Part II of my Figmate guide to preparing for the Adobe merger.

Have questions? Let’s connect.