Professional Documents
Culture Documents
LOW-BASIS STOCK
EF = Exchange Funds
1. DEFINING THE PROBLEM
Basis price that serves as the basis for the computation of capital gains
(might be different from the initial cost).
Low basis holdings in an individual portfolio may arise through:
Entrepreneurial success:
Significant shares in a founded company.
Cost equals to original investment in the venture.
Executive success:
Usually through equity compensation.
Value of these holdings may have risen substantially above the cost.
Investment success:
Portfolio comprising of several substantially appreciated securities.
Challenges while dealing with low-basis holdings:
Psychological attachments.
Investment issues (e.g. risk return tradeoff & taxes).
Market Risk
Specific Risk
Security specific.
Can be diversified away.
Residual Risk
Counterparty Risk
Risk due to
dependence on a
counterparty to
complete a
transaction
Regulatory Risk
Risk that tax
authorities may
reject a tax
treatment chosen.
Entrepreneurial Stage
Executive Stage
Investor Stage
No diversification desire.
Look for ways to minimize
transfer costs.
Financial Strategies
Outright Sale
Exchange Funds
Public EF
Private EF
Completion Portfolios
Hedging Strategies
Two Alternatives
Equity Collars