Block Women on level two of a three-level blue staircase

If you work—or worked—at a private company, maybe you think IPO planning is just what you do in the few months before and after the IPO.

After years of working with people before, during, and after an IPO, I’ve taken to dividing the IPO “journey” into three stages: 

  1. Years before the IPO
  2. Immediately leading up to the IPO and one to two years after
  3. For the rest of your life

If you are aware of these stages, and which stage you’re in, you can more effectively focus your time, energy, and emotions instead of you being more….blllaaarrrhhhhggg. (That’s my best description of how it feels to be overwhelmed by ignorance and anxiety and too much to learn and do and no sense of focus. How’d I do?)

Your IPO is a transition. One of many you will go through. 

I feel compelled to note, lest you get tunnel vision around “the IPO” specifically: An IPO can be a big financial event. And, fundamentally, it is “just” one more transition in your life. 

As humans, at pretty much every age, we are constantly going through transitions, big and small: get married, change jobs, retire, have children, move, have health problems, inherit money, etc. That is life! The work of navigating all those transitions is what good financial planning is all about.

Let’s discuss each stage of the IPO journey in terms of:

  • What defines the stage?
    This is simply my framework, and it helped me understand the IPO journey better. Hopefully it will help you, too. Other reasonable frameworks likely exist.

  • How liquid is your company stock at this stage?
    Put simply, how easy is it to turn your company stock into cash? Could you buy bananas with your company stock money tomorrow? The less liquid your company stock, the fewer choices you have. Which can be both good (fewer decisions!) and bad (you must retain the risk of having so much of your potential wealth in your company stock).

  • How complex is this stage, and what kind of complexity is there?
    The more complex, the more like you are to be stressed out about it and to Do Nothing for fear of doing the wrong thing.

  • What are the best practices at this stage?
    If you’re so inclined, you could skip straight to this part.

Stage 1: Years before the IPO

Your company hasn’t filed to go IPO. You hope it will happen in the next one, two, or few years, but if you’re honest with yourself, you don’t really know when and if it’ll happen.

Liquidity: Probably none.

You likely have no way to turn your company stock into money at this point.

If you’re lucky, maybe you can get liquidity (turn your stock into cash) through:

  1. Participating in a tender offer from your company 
  2. Selling stock through a private secondary market like ForgeGlobal or EquityZen

Usually, though, you have lots of potential wealth, but no actual wealth through your company stock. This is what you signed up for, right?

Complexity level: Some

If you have double-trigger RSUs, there’s literally nothing to be done about your company stock. Kick back and relax, man! That stock won’t become yours until a “liquidity event,” like an IPO or your company getting acquired. 

In one case, we’ve seen a (very large) private company fully vest a client’s double-trigger RSUs while the company was still private, as part of a tender offer, to allow its employees to sell some of their company stock for cash. This was very cool…and literally unique in our client experience.

If you have stock options, then yes, you have a decision to make: exercise or hold the options? At this early-ish stage in your company’s existence, there’s probably a lot of uncertainty in its future and so any money you put into your company stock is a gamble (i.e., you should rely on losing it…all).  

How do you make this decision? There are so many considerations.

Best Practices at This Stage

  1. Self work.
    Start exploring and clarifying for yourself What Is Important to You? Who are you, deep down?

    It’s this understanding—who you are and what you value—that will help you make the gnarly technical decisions when the IPO happens.

    But this is understanding that doesn’t just spring into existence, fully formed, like Athena from Zeus’s head. It’s a journey. One that never ends, in fact, and the more time you give it, the better your understanding of yourself will be.

  2. Get the rest of your financial life in order.
    Why? So that if/when the IPO happens, you won’t also be worrying about whether you have adequate life insurance, or how much to save to your 401(k) or how to invest your 401(k) or how you need to get your will and powers of attorney drafted.

  3. Decide whether or not to exercise exercisable options (including early exercising options, if that’s available).

Stage 2: Immediately leading up to the IPO, the IPO itself, and 1-2 years after

This stage starts with your company filing their S-1 to formally announce their intention to go public, goes through the actual IPO, and then lasts for a year or two after.

Why does this stage last for so long after the IPO event itself? Because the direct impacts of the IPO continue for at least a year after the IPO. You have to adjust to the many new financial realities of working in a public company. 

Liquidity: Finally!

This is what you’ve been waiting for, for years! If you’re still working at the company, you will only be able to sell stock during trading windows (and if you’re a muckety muck in the company, you might be subject to even more stringent restrictions). 

Complexity level: High technical complexity

This is an intensely technically complex stage.

Leading up to the IPO and the IPO itself

You have to understand:

  • When will the IPO happen?
    When your company files its S-1, that document will likely give some notion of when the company will IPO, but you’ll likely learn the actual day only a couple days in advance. So you’ll want to get your preparatory work done well in advance!

  • How the IPO will work?
    When will double-trigger RSUs vest? When will you be allowed to sell shares? Are there any restrictions on how many shares you can sell during those times? Can you choose how much tax is withheld when your double-trigger RSUs vest?

  • Which financial institution is going to administer the IPO? (Schwab? Fidelity? Morgan Stanley?) How does their web interface work? (My guess = Not well.)

In the year or two after the IPO

Now you are working at a public company and/or have stock in a public company. There are so many major implications of this statement.

  • Your RSUs are now taxable when they vest. And you likely owe estimated taxes.
  • Maybe now you have access to an ESPP.
  • You can sell your company stock easily now! How many shares and when are you going to sell? What are the taxes and how will you pay them?
  • You now are subject to trading windows. That is, you can only sell the company stock (if you’re still working at the company) for a few weeks out of every quarter.
  • Your tax return (and how much you owe in taxes) for the year of IPO is going to be bonkers.
  • Maybe you’re motivated to give to charity. How do you figure out how much?
  • Exercising options is different because you can now exercise and sell, not just exercise and hold.

There is clearly a lot of technical work to be done here. So much that the emotional work might get squeezed out a bit. But you should know that one of the biggest challenges of this transition starts now: your identity starts to shift from “I’m not wealthy” to “I’m wealthy.” 

That shift brings with it all new feelings, behaviors, responsibilities, and possibilities. If our clients are any indication, this is a weird and exciting and discomfiting change. How are you going to work through that evolution? Will you even be you anymore?

Best Practices at This Stage

  1. Self work.
    If you haven’t already spent time figuring out who you are and what you want, please set aside some time to talk through that with friends, your partner, a financial planner, etc. The clearer you are on this, the easier and better your technical financial decisions will be.

  2. Learn how the IPO will work.

  3. Create and execute a strategy for all the aspects of your equity compensation:
    Know that this strategy won’t survive the IPO intact. As the first few months or year unfolds, it’s okay to revise the strategy if things unfold way differently than anticipated. But having something you can adapt is way better than trying to build the airplane while flying it.

  4. Be prepared for chaos.
    We learned a lot of lessons while helping several clients through the Airbnb IPO (which was, in our opinion, a very successful and well-run IPO in most regards).

  5. Hire a CPA who knows how IPOs and equity comp work.
    Seriously people, do not DIY this mother. I can’t say anything categorically, but you are Very Likely To Regret not having a good CPA on your side. And don’t cheap out on it either.

  6. Build an investment portfolio, suited to your goals and your risk tolerance, that will stand the test of time.
    You have real money now. Possibly for the first time, or maybe you just grew existing wealth much bigger. That means you need to be serious (which doesn’t mean “complicated”!) about your investing, maybe for the first time in your life. Read our investment principles here

Stage 3: For the rest of your life

After you get through all the initial sturm und drang of the IPO—you’ve figured out how much you owe in taxes, you’ve learned how to deal with RSUs vesting in a public company, you now have a reasonable investment portfolio, etc.—whether that takes one year or two or more, you can start putting the IPO event behind you and start figuring out: Where can I go from here?

Liquidity: Lots. All the liquidity.

Once you’re no longer at the company, you can sell the stock for grocery money whenever you want (as long as you’re not married to someone who also works at the company…it happens!). 

If you’re still working at the company, you are still subject to trading windows. 

Complexity level: High human complexity

Depending on the amount of wealth you now have, your technical complexity could still also be high. I tend to be leery of complicated technical solutions, but sometimes there is some unavoidable “complexity of privilege,” as I have dubbed it.

For certain, your personal landscape has now permanently changed. 

Your work at this stage is to orient yourself in this new landscape, and explore the possibilities in this new stage of your life. What comes ahead?

For all the value of the technical work you’ve done these last few years to prepare for and get through the IPO, it really is now that all that work starts to pay off, and you get to start designing a possibly very new life for yourself.

There are fewer questions like “should I exercise my options and sell or hold?” and “when should I sell my RSU shares?” They’ve been replaced with exciting and likely angst-y questions in the category of “Well, I’ve got all this money. Now what?” 

Questions like:

  1. Should I quit my job? 
  2. Can I stop working? 
  3. Should I go back to school? 
  4. Can I take a sabbatical? 
  5. Should I buy a new home? 
  6. Should I fully fund my kid’s college fund?
  7. I have real concerns about the state of the world. How do I use some of this wealth to do something about it?

As my business coach, a long-time financial planner herself, describes it: there are three kinds of questions in financial planning:

  • Simple: “Am I eligible to make a Roth IRA contribution?” You can just google it.
  • Complicated: “How much Alternative Minimum Tax (AMT) will I owe if I exercise these ISOs?” You need to actually work at that, but there is an answer.
  • Complex: To wit, all of those questions listed above. There isn’t an answer. There are innumerable variables, many of which are unknowable. The (or a) right answer will end up being a combination of the numerical and the human.

Once you get to Stage 3, welcome to Complex. For the rest of your life.

Best Practices at This Stage

  1. Self work.
    Have you noticed the trend? In big and small ways, you need to continue to discover who you are. This is a particularly good time to do focused or lengthy work on yourself. Now you have the resources to make big changes in your life. You might think that having the money is the end of the IPO journey. In my opinion, it’s really just the beginning. The money is a tool for…what, exactly? That is your work now.

  2. Continue to execute (and review and adapt) whatever strategies you created before.

  3. If you haven’t reworked your estate plan since coming into this new wealth, please reach out to an estate planning attorney.

  4. Protect your wealth.
    If you haven’t ensured that your insurance coverage (life, disability, umbrella liability, etc.) is appropriate for this new level of wealth, please reach out to an insurance broker. Depending on just how much wealth there is and what you do in your business and personal lives, there might need to be other, more complicated estate planning work here. An attorney (estate planning, family law, etc.) can advise you.

I hope that this framework for thinking about your company’s IPO is helpful. I think it’s a good framework, but it’s not the only one.

If you are on your IPO journey and want a thinking partner to get you through the simple, complicated, and complex parts of it, reach out and schedule a free consultation or send us an email.

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Disclaimer: This article is provided for educational, 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. We 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 Flow Financial Planning, LLC, and all rights are reserved. Read the full Disclaimer.

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