Duolingo Stock Compensation Planning

Astra Wealth Partners specializes in equity compensation, such as ISOs, RSUs, and ESPPs. We help our clients reduce concentration risk driven by one’s employer equity grants while maintaining tax efficiency. The various types of equity grants provided at Duolingo create a multitude of complexities that can be optimized with sophisticated tax planning. In addition to equity compensation, we provide expertise in investment management, tax planning, retirement projections, and many other personal finance & wealth management areas.

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Incentive stock options, or ISOs, are a type of equity grant that provides the option to buy shares of company stock at a specific price, a strike price. Early employees who joined Duolingo pre-IPO will likely have ISOs with very low strike prices. One of the unique characteristics of ISOs is if you sell them at least two years from your grant date and one year from your exercise date, you can receive favorable federal tax treatment by paying long-term capital gains rate on the gains of the sale as opposed to ordinary income tax rates. The tax implications around ISOs can be complex mainly due to the Alternative Minimum Tax (AMT); however, proper planning can help minimize your overall tax burden.
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Restricted stock units, or RSUs, are a type of equity grant that provides shares of company stock, traditionally with a time-based vesting requirement. The grant is often based on a fixed number of shares as of a pre-determined date. Generally, Duolingo offers RSU grants that span four years. In this case, 25% of your RSUs would vest after one year, and the remaining will vest monthly over the following three years. Upon vesting, you will owe ordinary income tax on the newly vested fair market value (the stock price multiplied by the number of shares).

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Employee stock purchase plans, or ESPPs, are a type of employee savings plan that allows you to buy company stock at a discounted price. The specifics of ESPPs vary by company. We often see a contribution period of six months before vesting, like at Duolingo. In this case, you would defer after-tax money from your paycheck into the ESPP. At the end of the six months, Duolingo will purchase stock based on the lower price of the start and end date of the six months period, with an additional 15% discount. This is known as the look-back provision. You will then receive these Duolingo shares in your account.

You pay tax on the growth and the discount for stock obtained from an ESPP. Furthermore, you are taxed when you sell the shares, not upon receipt of the shares. You can also receive favorable tax treatment, known as a qualifying disposition, by waiting two years from the grant date and one year from the share purchase date. However, holding company stock past vesting to receive qualifying disposition treatment could create concerns around concentration risk.

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