Your company is going public. Whether that happens via a SPAC or the traditional IPO process, you have several important decisions to make in the near future. There are some key differences between the two processes, however, that can affect how you manage your stock options and company shares.
How do SPACs work?
A special purpose acquisition company (SPAC) is, as its name suggests, a company created specifically for the purpose of acquiring another company. Unlike a traditional IPO process, in which a company solicits investors and promotes its business in order to enter the public market, a SPAC sells shares to public investors without knowing in advance what business they will ultimately buy.
While the SPAC seeks a target company, it must keep the money it raises for the acquisition in a trust or escrow account. The SPAC has a maximum of two years from IPO to complete an acquisition, which shareholders must then approve by vote. If it fails to acquire a company within two years, the SPAC is dissolved and must return its investors’ money. Individuals can also choose to opt out of an acquisition and receive a return of their investment plus the interest it accrues while in trust.
What does this mean for employees of the target company?
Faster IPO with Less Initial Volatility
A traditional IPO process can take up to 18 months. It involves multiple investment rounds and courting of many different potential investors. For a target company, a SPAC acquisition is more like a single funding round. The entire process can be completed in just four to six months, and because the SPAC and the target company negotiate a fixed valuation for the company prior to IPO, it is less subject to volatility than the traditional IPO process.
Questions of Liquidity
In a traditional IPO, all existing shareholders must wait out the lockup period of up to six months before selling any of their shares. When a company is acquired by a SPAC, some shares that the SPAC purchases are held by existing shareholders, giving these shareholders immediate liquidity.
The shares that existing shareholders retain then form the majority of the new (post-acquisition) company. What lockup restrictions apply to these original shares after the merger as well as how employee incentive plans will operate going forward are matters of negotiation between the SPAC and the target company, so these vary from one deal to the next.
How should I prepare for my company's public offering?
The assistance of a tax and financial professional who has experience working with IPO and SPAC processes will be an invaluable asset as your company goes public. Both processes involve restrictions on share sales that can be complex, and both require strategic tax planning in order to manage tax liability in years that see a significant bump in income. An experienced investment advisor can help you create a stock sales plan that protects your wealth and helps you reach your financial goals.
A fiduciary advisor is required by law to act in your best interest when providing financial advice. Working with financial professionals who adhere to the fiduciary standard will help ensure their advice is driven purely by your financial interests, not theirs. Seek out trusted professionals with expertise in the following areas:
- IPO/SPAC planning
- Investment management
- Tax planning
- The alternative minimum tax (AMT)
- 83(b) elections
- 10b5-1 stock sales plans
- Tax loss harvesting
- Tax projections and year-end tax planning
- Retirement planning
- Advanced estate planning
- Charitable giving
As your wealth increases, so does the complexity of financial planning. Don’t be caught off guard by lockout periods or surprise tax bills. Sound guidance from experienced tax and investment advisors can help you successfully navigate this new financial terrain.
For more information on wealth management and the IPO process, browse the WRP blog.