Financial Planning Tips for After Your Company Files Its S-1


Now that your company has filed its S-1 with the SEC, you have many decisions to make that can be tremendously consequential to your financial future. This can be overwhelming, especially considering that this is likely to be a very busy time within your company as the document is refined and investors are courted. Here are some things to consider as you begin creating your financial plan during this critical and exciting period.

Understanding Your Stock and/or Options

There are many ways a company can provide equity incentive compensation to its employees. The first thing you’ll need to do is to understand which type (or types) of equity compensation you’re working with and the vesting procedures that apply. If you have stock options, you’ll have to decide whether, when, and how much to invest by exercising your options. If you have restricted stock, understanding how it vests is essential to avoid some common tax pitfalls.

Early Exercise

If you have stock options, your company may allow employees to exercise them early—before vesting occurs. Exercising your stock options early means that you pay for them before you have any guarantee of actually receiving the stock or any particular value in return; if you leave the company before your shares vest, you risk forfeiting them. (In practice, however, companies will often buy back unvested shares at cost in this situation.)

When you exercise stock options early, you start the clock on important tax holding periods and gain the ability to realize the paper gain on your tax return on the date of early exercise. This has the potential to result in substantial tax savings, but it’s important to carefully assess the risks of early exercise before moving forward.

83(b) Election

If you have exercised stock options early or received a restricted stock award (RSA), you may file an 83(b) election within 30 days of the exercise or grant. Doing so allows you to calculate the paper gain on the transaction—the difference between the share purchase price and fair market value—at the time you make the election instead of when your shares vest.

Calculating and reporting the gain early is often an advantage, since pre-IPO shares in a company are generally expected to increase in value after IPO. An increase in value is never guaranteed, however, and if the price declines, the IRS won’t refund of the extra taxes you paid.

The Lockup Period

Don’t expect to be able to sell your company shares on IPO day! Most often, lockup periods prevent employees from selling their shares in the early days of public offering. This helps stabilize the share price by preventing employees from flooding the market with shares on day one. It’s typical for lockup periods to last for six months, but they can be shorter or longer. Waiting out the lockup period can require careful financial planning.

Blackout Periods

Even after the lockup period expires, you may be subject to blackout periods, during which those who have material, nonpublic information about a company are prevented from trading its shares. By planning ahead, though, it’s possible to avoid these blackout periods. 17 CFR § 240.10b5-1 allows a securities holder to enter into a binding trading contract at a time when they are not in possession of material, nonpublic information about the company, thereby avoiding the appearance of insider trading that blackout-period trades would ordinarily create. Such contracts are commonly known as 10b5-1 trading plans. An experienced investment advisor who has experience working with IPO employees can help you create such a plan.

Holding Periods

How long you hold your stock before selling it affects its tax treatment. As a result, understanding holding period requirements is an essential part of early planning for your company’s IPO.

Short- vs. Long-Term Capital Gains

Long-term capital gains tax applies to gains from the sale of assets that are held for more than one year; if you sell your shares after holding them a year or less, then your gains will be subject to short-term capital gains tax rates. Long-term capital gains rates now range from zero to 20%, while short-term rates mirror regular income tax rates, ranging from 10% to 37%.

Qualified Small Business Stock

If your stock meets the criteria for qualified small business stock, then you may be able to exempt all your gains from federal taxation by holding your shares for at least five years.

Alternative Minimum Tax

The Alternative Minimum Tax (AMT) is designed to prevent high-income taxpayers from paying too little tax. It does so by limiting the tax breaks that are available to such earners. If you’re subject to the AMT, then you’ll need to calculate your tax liability both with and without certain tax preference items and pay the higher of these two amounts. An experienced tax planner can help you anticipate the effect of the AMT and implement strategies to mitigate its impact.

WRP specializes is helping employees and executives navigate the IPO process and make the most of the once-in-a-lifetime opportunity that an IPO can provide. For more tips on preparing for your company’s IPO, download our free ebook, “9 Crucial Financial Planning Steps to Take When Anticipating an IPO.”