The unique, initial 7-day trading window for all the Airbnb employees after the IPO has now closed. What might we learn from Airbnb’s IPO, even though we still have most of a 6-month lockup left to go? I think plenty.
First of all, congratu-freakin’-lations to all the Airfam. That went better than expected, eh?
For anyone else whose company is going through an IPO or plans to soon, I’m writing this blog post for you.
At Flow, we helped 11 clients prepare for and go through the initial stages of Airbnb’s IPO. Airbnb’s IPO was, to my knowledge, a first in that it allowed employees to sell stock from the get go. I ardently caution against drawing conclusions from one IPO to use in the next. (“DoorDash popped by almost 100%, so I want to plan for Airbnb to do so also!” Even though, of course, it did.) Even with that said, I think there are definitely some lessons to be taken away from Airbnb’s IPO.
So, if you work at Affirm, or Roblox, or Bumble, or Instacart, etc. etc., I hereby present some lessons learned, or at least confirmed, in Airbnb’s IPO, and I hope it will help your IPO experience be better organized, less stressful, and strategic.
NOBODY KNOWS WHAT WILL HAPPEN.
Oh, I’m sorry…did I accidentally leave my Caps Lock key on for that?
If ever there were an example of “no plan survives encounter with the enemy,” Airbnb’s IPO was it. (Um, upon rereading that, I’m sure many actual battles were way better illustrations of the idiom. Forgive a girl a bit of unearned hyperbole.)
Only a week before the IPO, our Airbnb clients were talking about $50/share. Then the stock was priced at $68 when it went out, started trading at $146, got down to $125, and last week was trading slightly above $155.
I’m sure there were people out there who “knew” ahead of the IPO that Airbnb stock was going to “pop” to some crazy valuation like $150. But do not let hindsight make you think the $150 people were geniuses, or the $50 people morons.
More importantly, going forward, don’t think anyone has a lock on what a stock will do in the future. This is always the case in the stock market, but it is especially the case when the stock has no price history whatsoever in the public market, which is exactly the case for a company going public. Airbnb was a pretty popular stock on the private secondary market (through platforms like Forge Global), but even the highest price I saw clients get there was literally half of what the stock sold for on IPO Day.
What can you take from this?
- Please try to not feel (as) bad or insecure when people around you are certain that such and such is going to happen in the IPO. They’re just blowing smoke.
- Please create a plan for your IPO that will be okay no matter what happens to the price, and to really thrive in the circumstances that are most important to you.
Okay, I admit it, and a third thing: as a financial professional, I just get reaaaaallly sick of misplaced confidence and having to sit back and say, “Uh huh. Iiiiiinteresting.”
Making a plan is essential. Even if you abandon most of the details.
We created a plan with one Airbnb client who said, “If I can get $53/share, I’ll be so happy. I’ll sell half my shares ASAP if it gets to $53. Otherwise, I’ll sell them steadily over the course of the 7-day window.”
That particular client, after the price popped to $150, sold 100 PERCENT OF HER SHARES as fast as her little fingers could click the sell button.
That wasn’t the plan. But, let’s review, it was better than the plan.
In order to arrive at that $53/share target, my client figured out what life goals she really wanted to support out of this IPO and the shares she was allowed to sell in the initial 7-day trading window. For her, it was largely a down payment. She calculated that she needed $53/share to get that down payment.
So, what was the driving force in selling her stock? A target of $53/share? Nope! It was her desire for a down payment. The fact that she could get her down payment and then some by selling at $150/share was rational justification for varying from the specifics of the plan. The fairly intense thought she had put into crafting that plan pre-IPO ended up informing a good—if different—decision in the heat of battle, as it were.
The ultimate point of a plan isn’t to execute the plan, it’s to support whatever goals or intentions the plan was created for. There’s a fine line between abandoning the plan because you’ve let fear or greed control you, and changing the execution of the plan in service of something better.
What can you take from this?
- Get really clear on the why of your plan. What goals or life plans do you want to support with this plan? This enables you, when you confront the actual IPO, to change the how in a reasonable way, if necessary.
It’s going to be stressful. Prepare for it.
Hell, I was stressed out all day on Airbnb’s IPO Day, and my relationship to the IPO was only vicarious. Unless you’re some sort of Zen Master, I don’t think there’s any way to avoid being stressed out (even if the stress is good!). So, prepare for it.
- Arrange for some emotional support ahead of time. We had clients who arranged to have a Zoom happy hour with other Airbnb friends after market hours were closed on IPO Day.
- Self-serving, sure, but find a financial planner. I met with and emailed with several clients on IPO Day and the days after. I didn’t help them do much in those meetings and emails. I spent most of that time simply reassuring them that it was all good. Sure, there were administrative difficulties, but they were experiencing the same thing others were experiencing, and also congratulations! You have a lot of money now! (If you do hire a planner, please do so as soon as possible. My colleagues and I had to turn away a painful number of deserving people who waited until the last minute, when we had no more capacity.)
- Take the day, or at least a few hours, off from work.
Prepare for an administrative clusterf*ck. Especially if there’s anything unusual about the IPO.
Not to toot my own horn, but having gone through the Palantir direct listing back in September, and seeing the listing day screw-up for its employees, I was fairly sure something was going to happen on Airbnb’s IPO that would create problems for employees trying to sell their stock.
What went on with Palantir? Palantir went public via a direct listing in late September. They had a traditional lockup for most of their stock, but employees were allowed to sell 20% of their shares immediately. Many Palantir employees wanted to sell as soon as the stock started trading. Unfortunately, they were locked out of their brokerage accounts for hours.
So, given that Airbnb’s IPO was going to unfold in a pretty novel way, as Palantir’s had but more so, I expected there to be administrative problems. I do not intend this as a criticism of Airbnb, or honestly, even Fidelity, which is the platform Airbnb uses.
What Airbnb did with their IPO— allowing employees to sell a fraction of their stock in the first 7 days—was a first, to my knowledge. It was only rational to expect it to not work smoothly. Fidelity had never done this before! No company had done this before! I’m honestly surprised and delighted it turned out as well as it did (she said after not spending hours herself on the phone to Fidelity trying to make sales go through or exercise options or ensure sales were taken from the correct “bucket” of shares).
What can you take from this?
- Set your expectations appropriately.
- Keep your strategy as simple as possible. Every bit of complexity is inviting the Gods of Administrative Hell to come screw with you.
Setting RSU tax-withholding isn’t the end of your tax issues.
One of the Very Cool things that Airbnb did for its employees was allow them to choose how many shares to withhold from RSUs vesting on IPO Day to pay taxes. They could choose:
- 22%, the legal minimum, at the federal level, which likely wouldn’t fully cover the tax liability, or
- 37%, which would fully—and in some cases, more than fully—cover the tax liability.
Having ushered some clients through the Uber IPO, where the RSUs vested on Day 1, there was no choice to withhold more than 22%, and then watching the stock price drop by ⅓ before they could sell any more shares, I really super de duper appreciated this gesture from Airbnb.
If you chose 37% withholding, then you were guaranteed to 100% cover your tax liability on the RSUs vesting on IPO Day. No need to pay anything out of pocket after that. But then, it turns out, the stock price jumped from the $68 the RSUs vested at to $150ish…and that’s where many of our clients (delightedly) sold many of their shares.
My typical advice to people who receive RSUs in public companies is “sell your vesting RSUs ASAP.” If you do that, then usually there’s not much change in stock price from the moment of RSU vest to the moment of sale. And because tax liability is calculated at vesting, there’s usually very little additional tax liability incurred at sale.
However, when vesting occurs at $68 (and you pay your taxes by withholding that 37% of shares) and then you sell at $150, you now have a $72 gain that you owe additional taxes on.
Fundamentally, this is a very good position to be in. “What? Owing taxes on a $72 gain is a good thing? You crazy, woman.” Well, yes, it is good because the reason you owe tax is that you just made so much damn money on the stock.
From a practical perspective, if you sold a bunch of vested RSUs during the 7-day trading window, you definitely owe taxes on that sale, and you might need to pay estimated taxes by January 15. Here’s hoping you already have an established relationship with a CPA, ‘cause that’s gonna come in real handy about now.
What can you take from this?
- Find a CPA well in advance of your IPO.
- Keep your CPA in the loop any time you withhold or sell shares.
Trading on Day 1 is especially hard.
IPOs usually have a lockup that lasts 180 days. In either case, by the time you are allowed to sell your shares, you have at least some amount of stock-price history to base your decisions on. I realize this is why Uber’s IPO felt so much easier to me—even if it went way worse—than Airbnb’s. Uber had a traditional 6-month lockup.
Going into Airbnb’s IPO, knowing we could trade on Day 1, it was a total crapshoot. And that pop sure proved the point that predicting was pointless.
What can you take from this?
- Make a strategy that depends as little as possible on the actual price. For example, a strategy that says “sell 1/7 of my shares at 10 a.m. on each morning of the 7-day trading window” is not affected by the stock price. If the stock price is high, great! You’ll get that high price when you sell your 1/7 of shares. If it’s low, you’ll get that low price. Both ways, you’re reducing your (risky) concentrated position in the stock and getting cash.
- Make a strategy that can adapt to whatever the stock price is, without letting emotion drag your sorry ass all over the place. For example, a strategy that says “Wait for the initial trading price, then put in a limit order for $10 more per share, for all my shares, but also still sell 1/7 of my shares manually each morning at 10 a.m.”
I’m sure more lessons will come from the Airbnb IPO as the remainder of the initial 6-month lockup unfolds. For now, these lessons came in really handy for our Airbnb clients at the beginning of Airbnb’s IPO, and I hope the same can be said for you in your IPO.
Other posts in this “Airbnb is going public” series:
1. Airbnb Is Going Public. Time to Create a (Flexible) Strategy.
2. Airbnb Is Going Public. What a Good Time to Give Away Your Money.
3. Airbnb Is Going Public. What Should I Do with my RSUs?
4. Airbnb is Going Public. What Should I Do with my Stock Options?
Do you want guidance from someone who’s led clients through 3 different IPOs, and can help you navigate not just the technical but also the emotional considerations? Schedule a free consultation.
Sign up for Flow’s weekly-ish blog email to stay on top of my blog posts and videos.
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, accountant, and/or legal counsel 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.