Just three short letters create some of the biggest buzzes in the world of investing: IPO.
Short for initial public offering, it’s the moment when shares of a company are offered for sale to the general public for the first time. Your excitement as an investor can only be topped by one thing: you’re an employee of said company.
But rather than doing a happy dance, sit tight. There is so much at stake that you need to proceed carefully and think objectively.
We’ll work you through the financial implications of an IPO and the options that might be available to you.
Also, check our blog frequently over the next few weeks as we’ll explore other topics relevant to the tech industry.
What’s all the fuss about?
When a well-managed, well-known business venture goes public, investors look at the IPO as the chance to buy the company stock at the lowest price it will ever be. If the stock takes off, they will be able to reap profits later on.
There is no guarantee of such a windfall, of course; remember that investing in stocks is inherently risky. But the general assumption is that the stock price will go up—hence, the rush to get in on the ground floor.
Some IPOs even make history, like the February 2021 IPO of the online dating app Bumble. At age 31, its CEO, Whitney Wolfe, became the youngest female chief executive to take a company public.
Before all this excitement takes place, however, a lot of prep work has to get done, often accompanied by anticipation and anxiety among top managers and employees alike.
First things first.
Will the IPO affect your finances?
It very well could if you received or if you are receiving equity compensation in addition to your paycheck. Your company might have given you stock options as a retention or productivity incentive. Stock options are a limited number of shares you may buy at a predetermined price at some point in the future, regardless of the current market price of the stock at that time.
Once the company stock starts trading on the open market, you may be able to sell your options or some of them, and, if you net a profit, use the proceeds to achieve other financial goals. Be sure to understand what kind of stock options you were offered:
- RSUs or restricted stock, are typically granted to senior company executives.
- NSOs, non-qualified stock options, available to employees of the company as well as outside consultants and advisors.
- ISOs, incentive stock options, are available to company employees only.
Also, be clear about the vesting schedule of your options and any possible lockup or blackout periods that could curtail your ability to sell your shares.
Quick review:
- Vesting: The time when your stock options become available for you to buy and sell them. Typically, you will have to be with the company for a certain amount of time before all your options are vested. Sometimes, IPOs involve the immediate vesting of all options.
- Lockup period: The time you will have to wait before you are allowed to sell your shares after the IPO. A 180-day period is common. Companies want to avoid sudden flooding of the market by employee-held stock that could depress the share price. During this time, you may observe the stock price rise and rise, and feel tempted to start spending your anticipated earnings. Don’t! The market is most likely going to be volatile for a while after the IPO and what may look like a phenomenal windfall today could turn into a big loss tomorrow. So don’t make any financial commitments until you have actually sold your shares.
- Blackout period: Other restricted periods when you may not buy or sell company shares, e.g., prior to the release of earnings reports or the introduction of new products.
Build a pre-IPO strategy so you are prepared to sell or hold when the time comes. Research your options, prepare to be flexible, and understand the consequences of your decisions.
Ideally, you’ll start this process a year in advance or as soon as the date of the IPO is announced, fully knowing that it could be postponed and rescheduled.
Clarify your financial goals
In this scenario, “why” becomes the fundamental question.
- Why would you want to sell your shares, provided they will net you a handsome profit?
- What will you do next?
- How does the windfall align with your financial objectives and values?
You may want to get married and buy a house or pay off student debt, or perhaps take time off to travel or start your own business. Knowing your vision for your future, and having the courage to pursue it, is critical when planning your finances and fine-tuning your strategy.
From a financial planning perspective, we want to remind you of the value of diversification. Even if you hesitate to sell your shares because you lack specific plans for the profits, at the very minimum, invest the proceeds into other equities to spread the risk of market volatility.
Research the tax implications
Just as you want to clearly understand the type of stock option you were offered, you need to comprehend their tax implications. Proceeds from the sale of RSUs, NSOs, and ISO are taxed differently, subject to either income or capital gains taxes or even both.
Also realize that the transaction could push you into a higher tax bracket, presenting you with a formidable tax bill. You might even have to pay an Alternative Minimum Tax, along with the potentially higher tax preparation fee.
Plan in advance various ways to minimize your tax liability. These might call for selling some underperforming assets in your portfolio, gifting stock options to family members or charitable organizations, deferring current year tax deductions, or postponing the sale of some or all of the company shares. Consult with your tax advisor, the stock options plan administrator, or financial planner.
Celebrate the IPO
The birth of a publicly-traded company is cause for celebration. All the more so if you are well organized and know what to expect.
So embrace the pre-IPO preparations as an exciting time despite the pre-performance jitters. If you plan in advance, anticipate various scenarios, and always keep your eyes on your goals, you will do just fine.
Always feel free to call on us for guidance and support throughout the whole process. We’ll cheer you on along the way while keeping you focused and intentional.