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John is the Chief Investment Officer (CIO) at Secfi. An expert in portfolio construction and investments, he helps individuals maximize returns and control risks unique to their situation.
An IPO can generate life-changing wealth, so it’s pretty important not to fumble it! For those who may find themselves with equity in a soon-to-be public company, there are things you need to do and prepare for to take full advantage.
Many people may think that the outcome of their equity ownership is out of their hands. This is only partially true, as there are many decisions you can make that will impact the outcome. It’s important to know what those are and how to approach them. And your decisions don’t stop when the company IPOs.
Your exercise timing and how much you sell after the lockup both change what you keep after taxes. Test those IPO decisions against your own grants with Maeve, Secfi’s AI equity assistant, which pairs AI flexibility with the reliability of Secfi’s tax calculation engine.
Before getting to the decisions, it helps to know what changes on IPO day.
Before listing, the company and its underwriters (the investment banks running the deal) set the IPO price, as the SEC’s IPO investor bulletin explains. Three things shape it:
Once trading starts, supply and demand set the price daily. The first trade can differ from the IPO price (more on the first-day “pop” below). From then on, the public price sets what your equity is worth, replacing your last 409A valuation and your latest round’s preferred price.
Your options and RSUs become sellable, usually once the lockup ends. That’s typically about six months after listing, which the SEC’s IPO investor bulletin puts at 180 days.
Double-trigger RSUs need both time-based vesting and a liquidity event such as an IPO, so the IPO can trigger vesting and taxation. Exact settlement timing depends on your plan. Options remain exercisable according to your company’s plan.
Your private shares convert to publicly traded stock. The price moves daily and liquidity improves. Selling shares triggers tax events.
A lot of people at startups put off making decisions about their equity for understandable reasons: it’s confusing, it’s not imminent, it’s stressful. Many think, “I’ll wait for the IPO before making any decisions”, but not making any decision is a decision and may pigeonhole you! It’s better to be proactive than reactive. You don’t want to be forced to make decisions that are either not informed or less-than-ideal.
An obvious example is if you leave your company, or are let go. You’ll have to make a decision about what to do with your equity. And the company may be a great one, despite your personal feelings about leaving. Not being backed into a corner is a major reason to get ahead of your equity, but really it’s about creating flexibility to get the most out of it if, and when, an exit event happens.
So here’s what to start thinking about now:
Generally, exercising earlier rather than later can save you thousands of dollars in taxes. But it also carries risks too. A later-stage company is more likely to exit than an earlier one, for obvious reasons. You have to weigh the risks and benefits and make a decision that is best for your family.
Should I self-fund it or finance it? If I’m coming up with the cash myself, where should I pull it from? What part of my portfolio should I sell to generate the funds for the exercise? Does it make sense to tap retirement assets to exercise?
Taxes, portfolio diversification, and investment strategy will play a role in the optimal decision.
Maybe your company offers a tender, maybe there’s a secondary market for your shares, or maybe you’re able to get financing that offers you liquidity. Should you take it?
Well, it certainly depends. Your cash flow situation and balance sheet will matter as will the viability of your options and the company’s plans/likelihood of an exit.
It’s often a good idea to diversify when given the opportunity, but you’ll also want to look at how much you should sell and from which grants in order to manage taxes and set yourself up for potential future gains.
It’s easy to think the IPO is the end of the road. Yes, it is a major milestone but it’s hardly the end. When the company goes public, employee shareholders are at the beginning of another set of consequential decisions.
Yes, when to sell is a major one. But there’s quite a bit more to it than timing the sale. It’s ultimately about what the windfall means for your life.
How will you use this event to achieve your financial goals? Whether that’s buying a house, planning for retirement, or taking an extended sabbatical to figure out your next career move. At the end of the day, the IPO is the moment when things get real.
It can be easy to view it as a lottery ticket: you get some cash or you don’t. But it’s not a binary outcome, the decisions you make today can materially impact the windfall that builds a financial foundation for the rest of your life.
Here are decisions you’ll likely need to make once your company does go public:
Typically, there’s a lockup period for employee shareholders (often six months after listing, or 180 days per the SEC’s IPO investor bulletin, but it can vary company to company). However, there is the chance that you may be given the option to sell some earlier. Sometimes, this is based on criteria, like if the stock price increases by a certain percentage, employees can sell some percentage of their holdings by some date.
So, should you? Well, you’ll need to ask yourself (and your financial advisor) some questions, especially: What’s your outlook on the company? Most IPOs experience a first-day “pop.” Historically, that pop has averaged 19%¹, but the range of potential outcomes is wide.
And also: Is the potential extra return worth the risk for you? If this event is catapulting you to a different level of financial security the decision may be different than if this event is adding to your already strong financial situation.
It’s likely that you can exercise during the lockup period, but you should check the paperwork you’ve been sent from your company. Or, you can ask your company’s equity team.
Again, exercising options earlier can help you reach the more-than-one-year holding period that makes your gains eligible for long-term capital gains status, potentially saving you a lot of money. All else equal, you want that clock to start ticking as early as possible to give you the most flexibility.
The media and financial analysts will be watching the lockup expiry like hawks. The potential supply from insider selling might mean investors will be cautious until the share overhang from the lockup is over. In other words, there is often a large number of sales when the lockup ends because employees can finally sell! This can lead to a dip in price, though often temporary.
The right decision will depend on many factors similar to those in the previous point. Often, diversifying as soon as you can makes sense, especially if the stock makes up a significant percentage of your net worth. The goal is to move some of that into more reliable investments.
How much you should diversify / sell and when depends on your own financial situation, as well as your outlook of the company in the short- and long-term.
When a stock trades publicly on an exchange, there is much, much more liquidity available than when it’s private. This is great because it means transaction costs are lower, valuation certainty is higher, and you can sell almost anytime you want.
“Liquidity” is multidimensional. A narrow spread between the “bid” and “ask” (the price you can sell/buy at) may be great for trading costs but may only apply to a limited number of shares. If you have a lot of shares to sell, you also care about the “depth” of the order book.
One way to avoid getting poor prices is to spread out your trading over time and use limit orders. Think of it this way: If a grocery store has millions of boxes of Cap’n Crunch to sell, the natural buyers may run out of demand and the store will be forced to lower prices on Cap’n to get others interested in buying. You don’t want to be selling all the Cap’n Crunch all at once, it’s better to space it out so supply and demand are more balanced.
This is a way to designate a stock sale plan ahead of time so that you don’t run afoul of insider trading rules. The trading is outsourced to a third party and executed according to the predetermined plan. It’s most common for officers and directors of a company that have access to inside information.
Tax rates are different depending on the holding period, type of stock, and where you live. It can get complicated. Especially if you paid the Alternative Minimum Tax (AMT) upon exercising and want to use your carry forward credit upon sale of the stock. This is why working with a financial and/or tax professional is imperative when making these decisions.
Those are the federal withholding rates for supplemental wages in IRS Publication 15: 22%, or 37% once supplemental wages pass $1 million in a calendar year.
Do you like being surprised by bills? I don’t. With a windfall like an IPO, your tax bracket is likely going to be higher than a typical year. Are you setting aside enough to cover your tax liability? Withholding too little relative to your eventual obligation can subject you to additional risk. Withholding too much means you missed out on using those funds.
Ooooh, think of all the possibilities! A house? A vacation home? A trip of a lifetime? The possibilities are literally endless.
One of my favorite investing quotes is: “Don’t risk what you have and need for what you don’t have and don’t need.” If this event is establishing a baseline of financial security/freedom for you, it’s probably best not to YOLO into a concentrated portfolio and instead invest the proceeds in a more reliable and diversified way. The larger your portfolio relative to your needs, the more idiosyncratic moonshots you can take.
But until you’re set with the basics, you should diversify! What does a diversified portfolio look like? I could spend pages and pages describing the considerations for creating an asset allocation and a portfolio. For now, I’ll give you a good starting point.
The “market” is the default portfolio. What is the market? Well, it’s every investable asset possible in its proportional weight. That portfolio is impossible to own, so you have to take some practical shortcuts. For your stock portfolio, it’s all the listed stocks on all the exchanges all over the world in their proportional weights.
There may be reasons to deviate from this portfolio. But if you are deviating, ask yourself why. Do you really have a good reason? The S&P 500 is roughly five hundred stocks. There are tens of thousands of publicly traded companies worldwide.
These are just some of the many, many questions you’re likely to ask yourself, those around you, and hopefully a competent advisor. There will be others, like, “should I set up trusts for my children? And how should they be structured?”. If you’re charitably inclined, you may want to explore tax efficient giving strategies. You’ll also likely look for other ways to minimize your taxes among a myriad of other decisions.
One thing to remember is that these questions don’t necessarily happen once, and they don’t happen in a vacuum. A financial and investment plan is a living, breathing thing. It changes when it needs to, and when you want it to.
Changing jobs, having children, buying a home, moving to a new city, angel investing, etc. may all be reasons to make new or different decisions with your money.
The questions above mix tax rules with personal goals, and most people want help with both. Secfi builds equity planning services and tools for people whose wealth is tied to company stock:
We believe the months before an IPO are a smart time to put a plan in place. If you want an advisor who specializes in equity compensation, talk to Secfi’s wealth team.
Based on our experience, the biggest change is that your equity can finally turn into cash, usually once the lockup period ends. That’s typically about six months after listing, which the SEC’s IPO investor bulletin puts at 180 days.
Double-trigger RSUs need both time-based vesting and a liquidity event such as an IPO, so the IPO can trigger vesting and taxation. Exact settlement timing depends on your plan. Your options stay exercisable under your company’s plan.
Your vested options stay exercisable under your plan’s terms, and liquidity may still come through a tender offer or a secondary sale. Many companies give you 90 days to exercise vested options after you leave, though some offer longer windows; ISOs generally must be exercised within three months of leaving to keep ISO tax treatment.
Employees typically keep the equity they already hold. Your private shares convert to publicly traded stock. Some companies also let employees sell a portion in the IPO itself, as covered above.
Double-trigger RSUs need both time-based vesting and a liquidity event such as an IPO, so the IPO can trigger vesting and taxation. Exact settlement timing depends on your plan.
¹ Source: Jay R. Ritter, IPO Statistics, University of Florida
The tool shown here uses artificial intelligence and is for illustrative purposes only and not necessarily indicative of future results and there is no guarantee that similar results can be achieved. The information provided by the tool is not professional advice and is not intended by Secfi, Inc., its affiliates, and Secfi representatives, to be deemed as investment, legal, tax or other professional advice or recommendations of any kind, or to form the basis of any decision to do or to refrain from doing anything. Secfi does not review the accuracy or completeness of the information provided to us within the tool.