Gifting Pre-IPO Stock to Charity Before Lockup Expires

A senior IC at a newly-IPO’d tech company holds 5,000 shares of stock that vested over the past 2 years. The IPO priced at $38 and the stock is trading at $85 on day 10. Lockup extends for another 160 days. The employee can’t sell but would like to donate some shares to their DAF for tax efficiency.

The answer: yes, pre-lockup donation works, with specific constraints. Shares subject to insider-trading restrictions can be transferred to a DAF, the DAF takes ownership subject to the remaining lockup, and the donor gets a deduction based on fair market value on the transfer date.

But valuation, lockup-inherited-transfer mechanics, and employer cooperation all matter. Done wrong, the donation can be disallowed or valued at a discount.

The basic structure

Mechanics:

1. Donor identifies specific vested shares for donation
2. Donor contacts DAF sponsor (Fidelity Charitable, Schwab Charitable, etc.) to confirm acceptance of lockup-restricted shares
3. Donor works with employer counsel and stock plan administrator to coordinate transfer
4. Shares transfer from donor’s account to DAF’s brokerage account
5. DAF receives shares subject to remaining lockup
6. Donor receives deduction letter at fair market value on transfer date
7. DAF holds shares through lockup, then sells when released

Which shares qualify

Not all pre-lockup holdings qualify for fair-market-value deduction. Requirements:

• Shares must be long-term (>1 year holding period from vest date)
• Shares must be transferable (insider holders need employer sign-off)
• Recipient must be qualified public charity or DAF sponsor
• Transfer must be completed (not just promised)

For RSUs vested >1 year ago and now subject to lockup (post-IPO 180-day restriction), the combination works. For recently-vested shares (<1 year) or shares subject to insider-trading rules blacking out all transfers, the deduction may be limited.

Fair market value determination

FMV for the deduction is the trading price of the stock on the date of transfer. For a publicly-traded stock, this is straightforward: stock closed at $85 on the transfer date, so 5,000 shares = $425,000 FMV.

Lockup doesn’t reduce FMV for deduction purposes (SEC registration is separate from tax valuation). The donor deducts $425K.

One wrinkle: some tax advisors argue for a discount for lack of marketability on lockup-restricted shares. The IRS typically resists this argument for short-term lockups (180 days). For longer restrictions or specific contractual restrictions, a DLOM discount might apply. Most donors forego the DLOM argument and take the undiscounted FMV.

The 30% AGI limit interaction

Appreciated stock donations are limited to 30% of AGI. For an IPO-year donor with high AGI:

• AGI might be $4M (RSU vest income)
• 30% limit: $1.2M of appreciated stock deduction

A $425K donation fits within the 30% limit comfortably. Larger donations (multi-million-dollar) might hit the ceiling and carry forward.

Employer cooperation

Most late-stage companies and newly-public companies have internal procedures for charitable transfers. The process typically involves:

1. Employee notifies Employment/Stock Plan administration of intent to donate
2. Administrator verifies vested shares available
3. Administrator coordinates with company counsel on insider-trading policies
4. Administrator facilitates the transfer via the company’s stock plan custodian

Some employers are friendlier than others. Large tech companies with staffed stock plan teams handle these routinely. Smaller recently-public companies may need 4-8 weeks of coordination.

For insiders (executives, directors, 10%+ holders), Section 16 reporting may apply. Gifts to charity are reportable under Form 5 within 45 days of year-end or sooner.

10b5-1 plan considerations

If the donor has an active 10b5-1 plan, donations are usually separable from the plan. The 10b5-1 covers sales; gifts are separate. But some plans do include charitable transfer provisions, and the plan’s pre-approved activities may include DAF donations.

If charitable giving is anticipated, building it into the 10b5-1 structure provides clean insider-trading safe harbor.

Pre-IPO private stock donations

Some DAF sponsors accept pre-IPO private stock. This is rarer than public-stock donations but possible:

Fidelity Charitable. Generally doesn’t accept pre-IPO private stock without specific arrangement.

Schwab Charitable. Limited acceptance of pre-IPO private stock.

Community foundations. More flexibility; often work with donors on complex assets.

Specialty DAFs. Some organizations focus on complex gift acceptance.

For pre-IPO donations, the valuation is typically based on:

• Most recent 409A valuation
• Recent tender offer or secondary transaction price
• Independent valuation expert opinion

The IRS scrutinizes pre-IPO private stock valuations. Over-valuation relative to defensible comparables can result in substantial-understatement penalty under IRC §6662.

Timing against the IPO

Donate before IPO. The shares are typically pre-liquidity (not yet vested for double-trigger RSU purposes). Cannot donate unvested shares. Early-exercised ISOs held long-term can sometimes be donated pre-IPO at 409A valuation.

Donate during IPO roadshow window. Limited option; insider quiet period restrictions apply.

Donate day 1-30 post-IPO. Now shares have public-market valuation. Subject to lockup, but donateable. This is the most common window.

Donate during open window post-lockup. Simplest; no lockup constraint, full FMV deduction.

For an IPO-year donor, the first post-IPO open window (typically day 1-30 or post-lockup day 180+) is the cleanest path.

State tax implications

Charitable deduction flows through to state tax in most states that conform to federal itemized deductions. California allows charitable deduction similar to federal.

For state trailing-nexus (California move), the charitable deduction at federal level reduces state income regardless of the donation’s sourcing. There’s no separate state sourcing rule for charitable deductions.

Frequently asked

Can I donate unvested RSUs? No. You can only donate what you own. Unvested RSUs are contingent and not your property yet.

What about stock that’s locked up but beyond 1-year holding? Locked-up public stock held >1 year qualifies for fair-market-value deduction. Lockup doesn’t reset the holding period, the holding period runs from vest date.

Does §6501 statute apply? Yes, 3-year federal and state audit windows apply from filing. Keep transfer records, acknowledgment letters, and valuation documentation permanently. The IRS can audit complex donations in later years.

Can I donate stock that’s subject to my own 10b5-1 plan? Generally yes, but the donation is treated separately from the plan. Some plans specifically allow charitable transfers; others require separate execution. Check the plan document.

What if the lockup extends? If the issuer extends lockup after the donation, the DAF holds the shares through the extended period. Donor’s deduction isn’t affected, it was valued at the transfer date.