Pre-IPO Planning Checklist

If your company is preparing to go public, whether through IPO, SPAC, or direct listing, you have a lot of decisions to make leading up to the big day. The choices you make in the coming weeks and months will have a lasting impact on your long-term financial future. Use this checklist as a starting point as you begin your pre-IPO financial planning to ensure you’re taking the steps necessary to make the most of this unique opportunity.

1. Understand what type of equity you have in your company and what you expect to receive in the future.


Early in the process, you’ll want to have a thorough understanding of your company’s stock plan and the shares and/or options you currently own. Some important questions to ask include

  • Do I own stock options, shares of stock, or a combination?
  • What type(s) of stock and/or options do I own or expect to receive in the future?
  • If I own shares, on what date(s) did I acquire them?
  • If I own options, does my company allow early exercise?
  • What is my vesting schedule?

 

An important part of this step is deciding how much to invest in your company. You’ll need to carefully assess the risks involved in owning a concentrated position in your company and plan how you’ll fund your stock purchases. This may include securing loans that you’ll repay after you’re able to sell some of your investment. Once you understand exactly what type of shares and/or options you currently own and expect to receive, you can begin to plan how to handle those assets.

2. Consider exercising stock options early.

If you have stock options, then you won’t own shares of your company until after you’ve exercised those options. Determine whether your company allows employees to exercise options before they vest (and before the IPO date), a practice known as “early exercise.” If so, consider the pros and cons of exercising your stock options early. Doing so could result in substantial overall tax savings, but bear in mind that you will need to pay for the shares and any taxes that result from the transaction well before you’ll be able to realize any gain from it.

3. If applicable, consider filing an 83(b) election.

If you’ve exercised stock options early or received a restricted stock award, then you’ll need to decide whether to file an 83(b) election. A restricted stock award (RSA) is a grant of company shares. If you accept the grant, you may be required to pay a purchase price to receive the shares. Your rights to the shares are restricted, however, until they vest. When your shares vest may be a function of time, of company performance, or of individual performance. You’ll need to review your company’s stock plan to know how any RSA shares will vest.

You have 30 days after exercising options or receiving restricted shares to complete an 83(b) filing. Doing so makes the transaction reportable for federal tax purposes on the date of exercise (in the case of options) or on the date of filing the election (in the case of an RSA). When a company does well, this can result in substantial tax savings, since share value can grow substantially after IPO. The shares will usually be redeemed for what the person paid for them, only forfeiting the tax dollars. In the event that you forfeit shares or their price decreases, you won’t be entitled to a refund of any tax that you paid early as a result of the 83(b) election.

4. Plan for your tax bills.

Various types of equity compensation are subject to different tax rules. This is one reason it’s very important to understand what type(s) of shares you’re receiving. If you hold double-trigger restricted stock units (RSUs), for example, you could be subject to a shockingly large jump in taxable ordinary income on IPO day. In the case of incentive stock options (ISOs), you will need to plan for potential alternative minimum tax (AMT) liability. A trusted tax professional who has experience in IPO planning can help you anticipate your tax bills and plan appropriately.

5. Plan to sell shares.

While IPO day is an exciting event for everyone in the company, it most likely will not bring immediate wealth. Except in the case of a direct listing, your shares will likely be subject to a lockup period of several months after your company goes public. During this time, you will be prohibited from selling any of your pre-IPO shares. Even after the lockup period expires, blackout periods will apply when you have access to material, nonpublic information about your company, further limiting your ability to realize profit from your investment.

Fortunately, the SEC allows company employees and executives to develop 10b5-1 trading plans to get around these blackout periods without creating the appearance of insider trading. Such plans detail times and amounts for future trades (either directly or by use of a formula or algorithm) and are made at a time when the shareholder does not possess material nonpublic information about the company. Working with a fiduciary investment advisor to develop a 10b5-1 plan gives you greater control over your investment and empowers you to create the foundation for a long-term plan to support your financial goals.

WRP specializes in helping employees and executives in pre-IPO companies make the most of their companies’ public offerings. For more tips on navigating the complexities of your company’s IPO, SPAC merger, or direct listing, browse our blog or our free resource library.