Congratulations! It might seem like all tech companies go IPO, but that’s not true. In going IPO, your company is in rarified company. And now visions of sugarplums, I mean, wealth are dancing in your head.
I imagine that, amongst those sugarplums and dollar signs, questions swirl about. Including: What’s going to happen to the stock options you currently have after the IPO finishes? Do they change? Do you have to do anything?
Now, ideally you take the opportunity to learn about how your stock options work before your company files for an initial public offering. Because, before an IPO, you might actually be able to do something (like exercising, or even early exercising) if it’s appropriate.
But if you’re just now starting to pay attention this stuff, first of all, join the club. Second of all, most likely all your options will stay exactly the same. It’s just you can’t do anything about them, one way or the other, until the lockup period ends (usually 90-180 days after the IPO).
So, kick back! Relax! And use the opportunity to do some learning and planning, so that you can do not just something but the right thing after the lockup period expires.
Going IPO Means Your Stock (Options) Can Actually be Money Now
Going IPO might make you immediately think of making tons of money. But the first thought that pops into my head is that now you can make any money.
As long as your company is private, all those options (and company stock, if you’ve exercised) are usually worth nothing. There’s no market for it. The only “person” you can sell the stock to is the company itself. (Admittedly, there are some high-profile cases of private-company stock holders selling their stock to third parties, most notably Uber through its two, count ‘em two tender offers this year.)
Even though it’s not worth any money now, owning stock in a privately held company is fun and exciting because it has the potential to turn into great gobs of money some day. That is, some day after your company IPOs. And now you’re here!
Once your company goes IPO, it means you can sell that stock for actual money. Dollah dollah bills, y’all. I think that is Pretty Awesome. Whether there are a lot of dollah dollah bills, or just a few, that’s another consideration.
Not Just “Liquidity” But Also Less Risk
Your company going IPO also means that the risk of exercising options is a lot lower.
Now, let me expand on that because “risk” can mean many different things. In this context, risk really means “uncertainty.” When your company is private, you have no idea how much that company stock will eventually be worth (if anything).
After your company goes IPO, the price of a share of company stock is now publicly known, every minute of every day, thanks to the public stock market it’s traded on. That knowledge means you can make a much better-informed decision about exercising your options and selling the resulting stock.
You know how much it’ll cost to exercise.
- You’ve always known that; it’s just the strike price as listed in your grant document, times the number of options you’re exercising.
You know how much tax you’ll owe when you exercise.
- Again, you’ve always known this, too, as tax depends on the company stock value, and your private-company stock has a value—just ask for the company’s 409(a) valuation—which you’d use even before it has a publicly-traded value. This mostly applies if you have non-qualified stock options (NQSOs). Tax at exercise of incentive stock options (ISOs) occurs only if you run into Alternative Minimum Tax, which is much less likely with the 2017 tax law changes.
And now additionally you know how much money you can get, right now, for selling a share of the stock! So, now finally you compare the cost of purchasing to the amount you’d get for selling…the missing part of the puzzle!
What to Do During the IPO Lockup Period
If you’re in the lockup period, and you can’t do anything, there’s still plenty for you to learn and plan. Of course, in an ideal world you’ll do this all way earlier, when you first get your stock option grants, or at least before the company files for an IPO and enters a lockup period.
But back here in reality:
- Read your stock option grant document. What does it say about what happens to your options during or after an IPO? Do your options continue to vest on schedule?
- Read the IPO documents. How long is the lockup period? Does it say anything about your stock options? Or restrictions on trading company stock?
- Make a plan for after the IPO-lockup period, for your options and your stock. I shan’t just regurgitate that linked article here. My point is that now is a good time to make this plan, if you haven’t already. You can’t do anything active with your options and your stock, so you can take a moment to think like a rational human being about it. Because once the lockup period expires, I think most rationality flies out the window.
You’ve got goals, and this company stock can help leapfrog you towards those goals, if you’re lucky. As the saying goes, however, “luck favors the prepared.”
If your company has filed for an IPO but you’re not yet in a lockup period, then you’ve got more, uh, options. More things you could be doing. First, of course, you still want to read and understand all your stuff (mentioned above). Then consider exercising vested options while the company-stock value is probably lower than it’ll be after IPO. Or considering early exercising unvested options (ISOs only).
After the Lockup Period
Being forced to sit on your hands can be frustrating, especially if you see your company’s stock price gyrating all over the place. This does give you an opportunity, however, to see how the company stock performs after IPO, and maybe even a little past the end of the lockup period (because so many insiders “dump” their stock as soon as they can, stock prices often dip right after the lockup period).
For the most part, though, after IPO, the “should I exercise or not?” analysis remains the same. You just have more certain information to play with because the company stock is now public.
Do be aware that after the lockup period, you’ll still likely be subject to trading windows and blackout periods, when you are not allowed to buy or sell your company stock. Without getting into all the details (which admittedly I don’t know all of), this is to prevent you from engaging in insider trading, which is a big no-no and occasionally, if you’re a high-profile woman, you get sent to jail for.
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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, 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.