Because it can take anywhere from six months to two years for a company to complete the pre-IPO process, your company’s big day may seem a long way off. Once you’re aware of the plan to go public, however, you have no time to waste. Here are some key considerations to keep in mind as your company moves along the path to IPO: through its preparatory stages, filing and amending its S-1, conducting the roadshow, and finalizing its offering.
Select financial and tax advisors.
Begin the process of choosing trusted advisors to guide your financial, investment, and tax planning as soon as possible. Even if your company’s IPO date is more than a year off, it’s not too early to begin your search. Hiring fiduciary advisors for financial and investment planning will help ensure they make recommendations that are in your best interest, not theirs. Additionally, working with advisors who have extensive experience with the IPO process and close working relationships with tax professionals can help you capture more after-tax returns on your investments. Getting your team in place early in the game will empower you to take full advantage of limited-time opportunities that arise well before the IPO date.
Understand your equity plan.
What do you own?
There are several different types of options and shares that your company may make available to pre-IPO employees. Each has its particular set of rules and tax consequences, so a critical first step in planning your strategy is to gain a thorough understanding of what you own and what you’re scheduled to receive in the future. This might include
- Incentive stock options (ISOs)
- Nonqualified stock options (NSOs)
- Restricted stock units (RSUs)
- Restricted stock award (RSA)
How does it vest?
In addition to knowing exactly what’s in your portfolio, it’s also important to understand how your options and/or shares vest. In many cases, vesting happens over a period of years, but in some, it can happen all at once. This often happens to owners of double-trigger RSUs: the first vesting trigger is a certain amount of time in service, but the second is the liquidity event (typically IPO). This means that large numbers of shares can suddenly vest on IPO day, creating a major taxable event.
Create an overall financial plan.
The decisions you make throughout your company’s IPO process should be part of a larger financial plan that takes in to account your individual means, goals, and priorities. Money serves many purposes in our lives, and the key to using it in ways that support our greatest happiness is having clear goals and objectives in mind. Once you’ve chosen an advisor, make sure they understand why you’re investing. Do you want to retire early and enjoy the good life without worrying about running out of money? Do you want to put your children or grandchildren through college, buy a second home, or make impactful contributions to causes you care about? You likely have several things on your list. When you’re clear about what you want most, you can create the most effective plan for attaining it.
Decide how much to invest in your company.
Having equity in a company that’s poised to take off can be a tremendous opportunity, but like any investment, it involves the risk of loss. An experienced fiduciary financial advisor can help you make calculated decisions about how much to invest that are grounded in your larger financial strategy. They can also make you aware of options for funding your purchases.
If available, consider taking advantage of Internal Revenue Code Section 83(b).
Many companies that provide stock options for their employees also allow them to exercise those options prior to vesting, a practice commonly known as early exercise. The main benefit of early exercise is the ability to then file an 83(b) election, which sets the fair market value of the shares for tax purposes on the date of exercise rather than on the date the shares would have vested. This can result in significant tax savings since the fair market value of shares is often much lower prior to vesting. An additional benefit of early exercise is that you’ll be able to meet holding requirements, such as the one-year holding period needed to claim long-term capital gains, sooner. 83(b) election is also available for holders of RSAs. An 83(b) election must be filed within 30 days of exercising options or receipt of an RSA.
Create a tax strategy.
Depending on the type of securities your company is providing, you could experience significant bumps in taxable income as your shares vest or options are exercised. An experienced tax planning professional can help you determine how best to mitigate your tax liability and anticipate upcoming tax bills so they don’t take you by surprise. Longer-term tax strategies might include placing assets in trusts so you can leave more to your heirs or your favorite charities.
The wealth managers at WRP specialize in helping pre-IPO employees make the most out of their company’s public offering. We understand that IPO is a life-changing event that brings a new level of complexity to managing finances. We’re here to help you make informed decisions every step of the way and use this once-in-a-lifetime opportunity to realize your dreams. To learn more, subscribe to our blog.