Is your company going IPO? With all the stories of IPO riches that transform people’s lives life, you must be getting excited.
First question to answer (realistically) for yourself is: Is your company going IPO? Keep in mind that “Yup! They just filed with the SEC!” is way different from “Absolutely. I mean, they’re awesome. I’m sure they will!”
Regardless of your answer, read on. Just know that “They just filed with the SEC!” means you should read it and then actually do something. All you other folks: Keep it in mind.
What You Should Definitely Do
Understand the tax implications of your stock options and potential future stock sales.
By which I pretty much mean: Hire an accountant. Really. Pay someone a hefty hourly fee for this analysis, and save yourself potentially thousands of dollars in taxes.
The accountant can help you calculate your potential tax burden if you exercise stock options (and later on if you sell stock). This can in turn help you to figure out how much stock you can reasonably afford to exercise.
Develop a plan to sell or donate the stock after the IPO.
Financial planning involves a lot of, well, plans. (This language thing ain’t for nothin’.) When it comes to investing, we call it the Investment Policy Statement. This document describes why you invest the way you do, what goals you’re trying to accomplish, and when and why you will make changes to your investments.
The key to an IPS is that you write it in easy times, so that when the markets or your life Get Crazy, you can “blindly” follow the IPS and suppress your emotions (to be clear: not a technique I encourage for the rest of your life), which otherwise usually lead investors astray.
You need a similar plan for your company stock. You need to write it before the IPO. And it needs to be specific. Hopefully you’re already thinking, “I will need to diversify out of this concentrated stock position.” (If you’re not, please start.)
But that’s not enough. I’m talking “I have X shares vesting over the next Y years, and I have Z shares immediately available, so let’s target selling off [mumble mumble formula] of them every [mumble mumble time period].” (Remarkably precise formula compliments of one of my favorite witty financial planning colleagues, David Meyers of Meyers Wealth Management.) And then, when the time comes, you Actually Do That.
Keep in mind that, after your company goes IPO, you won’t be allowed to sell your stock until the “lockup period” is over, usually between 90 and 180 days, and possibly even longer. So, you will have to sit on your hands watching the stock do…whatever, and not be able to do a damn thing about it. This could be really unsettling. Once your company’s IPO is filed, find out what your lockup period is.
It’s not just selling that you should plan for. IPOs can create a perfect opportunity for tax-savvy charitable donations: all of the charitable donation deduction and none of the potentially significant capital gains taxes.
Develop a plan for how you will manage the proceeds from the sale of your stock.
An IPO gone well is, fundamentally, just like any other windfall. One possible difference is that you knew it might be coming ahead of time, and so you have a chance to plan. Yeah!
This plan is two-fold:
“How am I going to save or spend this money?”
Of course, there are some basics of financial planning that I mustn’t neglect to mention:
- Pay off high-interest debt and make sure you have a robust emergency fund.
- Retirement needs to be next. You don’t need to fully fund it (though if you could, Awesome).
- What are your other goals? College for your kids? Travel? Sabbatical? Electric car? Solar panels? Gas range?
Considering that IPOs usually aren’t the golden parachute that we all dream of, however, don’t make plans that rely on you making a bunch of money. Have a plan for what happens if you do, yes, but also have one for if you don’t. Say you’re looking to buy a house: “Let’s figure out how much house you can/should afford ignoring the IPO, and then if the IPO comes through, we can go up to this amount instead.”
“Who is going to help me manage this whole process?”
Do you need professional help? This can be not only a financially complicated situation, but an emotionally difficult one. Fear of making the wrong decision can lead to doing nothing…or, of course, the wrong thing.
Start reaching out to accountants and financial planners and investment managers and estate planning attorneys before you actually have a ton of stock (or cash) in your lap.
What You Should Maybe Do
Exercise your stock options prior to the IPO.
Why would you do this? Because it “starts the clock” on your capital gains holding period. If you own the stock for at least a year, then your capital gains taxes on your gains (assuming the stock increases in value; not a guarantee) can be significantly lower. The earlier you exercise (own) the stock, the sooner you can get that preferential tax treatment when you sell the stock (which, in general, I’m going to recommend you do).
In a previous blog post about early-exercising stock options, I passed on some advice from Wealthfront, which is that the best time to early-exercise your stock options is when your company files for an IPO. Why? That’s the first time you know For Sure that your company is going IPO and that you’ll be able to sell the stock at a known time in the future. Exercising can bring tax payments; so if you exercise without knowing when you can sell the stock in order to pay those taxes, you’re increasing your risk.
I do not advise my clients on whether the IPO will do well in the short run or long run. Nevertheless, there are respectable (which is not to say “right”) outfits—like Wealthfront—that try to help you determine the likelihood of an IPO’s success. Note that “a majority of the companies that went public [from 2002-2008] (56%) turned out to be losing investments.”
With those statistics, this is more speculation (a 10-cent word for “gambling”) than investing. The prudent thing to do in that context then, is to participate to the extent you can afford to lose the money, because statistically you’re unlikely to get it back.
Be sure to look for any 83(b) early-exercise opportunities. Making an 83(b) election when you early-exercise can drastically reduce your tax liability later when you sell the stock. But you have to make that election with the IRS within 30 days of the stock grant; so time is of the essence. Keep in mind that early exercise can often cost a bundle, so if you want to do it, start stockpiling cash.
Give stock to family.
If you think the stock might appreciate significantly after the IPO (and, really, that is the default mentality in the IPO world, isn’t it?), then you can spread the love around in a tax-efficient way before the IPO.
How? By giving some of your stock to family members. This means you’re giving them something worth very little money now, but it might be worth a lot more later, when it’s no longer your tax problem, but the recipient’s tax problem. This makes particular sense if the person you give it to is in a lower tax bracket. It also helps with estate planning if your estate is Rather Large.
Both this and a plan to donate stock should ideally be considered and executed in collaboration with an estate planner, who can make sure your philanthropic drive is effectively coordinated with the rest of your estate plan and family dynamics. Giving stock away simply for the sake of reducing your tax liability is silly. It only makes sense if you already have the motivation to be generous.
More Advanced Ideas
If you are in line for a lot of equity, consider putting pre-IPO shares in an irrevocable trust, which can vastly reduce your own tax burden in the future, or your heirs’. Some Facebook higher-ups have received a lot of press for doing just this. You should absolutely seek tax and estate planning guidance for such a move.
Question: What confuses you the most about your company’s IPO plans? You can leave a comment below.
Do you want someone to help you understand how your company’s IPO affects you? Someone who can help you use it to reach your life’s goals? Reach out to me at or schedule a free 30-minute consultation.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner and/or an accountant for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.
