Congratulations, your company has finally gone public! At this essential turning point in your financial journey, it’s important to reassess your financial goals and priorities through the lens of your new circumstances. Seeking advice from experienced and trusted financial professionals will help ensure you’re aware of important tax provisions, deadlines, and other issues that will need your attention while helping you grow your wealth over the long term. If you don’t yet have an IPO wealth management plan, here are 3 reasons to get started now.
1. The future is uncertain.
While many shareholders see their stock value soar after IPO, others watch anxiously as it tumbles. This can be nerve racking, but making sure that your company stock is just one part of a sound overall financial plan will take any edge of impending doom off the suspense. As you plan whether and how much company stock to buy (or sell), working with a trusted investment advisor to ensure your portfolio is well diversified will insulate you from the ups and downs of any one company—including yours.
2. You need a sales plan.
It’s common for shareholders to be barred from selling shares within six months of their company’s IPO. Even after that time, managers and insiders of the company are often limited by trading windows. Planning for these restrictions is an important part of your investment strategy. A 10b5-1 plan, for example, allows eligible shareholders to sell shares outside of trading windows by establishing a schedule for doing so at a time when they are not privy to non-public information.
3. New wealth brings new tax issues.
If your company stock does take off after IPO, you can suddenly find yourself with a substantial amount of new wealth. Until now, your tax planning and preparation process may have been fairly simple and straightforward. While an influx of wealth can make life easier in many ways, it will almost certainly complicate your taxes. It will be important to plan carefully in order to avoid incurring unnecessary tax obligations, both for you during your lifetime and for your heirs after you’re gone.
Understanding Your Stock Plan
There are many types of company stock options, and each comes with a different set of rules. The type of options you have affects their tax treatment, so it’s important to tailor your tax and financial plan appropriately. Some important questions include
- What are the vesting procedures?
- If you have restricted stock units (RSUs), do they have a single or double trigger?
- Could you owe taxes on gains before you’re able to sell shares?
- Do you have incentive or nonqualified stock options (ISOs or NQSOs)?
- Do you have qualified small business stock (QSBS)?
An investment advisor who is well versed in the tax implications of IPO planning can make sure you’re asking the right questions about your stock plan to inform an appropriate tax strategy.
Short vs. Long-Term Capital Gains
Generally speaking, short-term capital gains are taxed more heavily than long-term capital gains. Long-term gains are the result of selling assets that you’ve owned for more than one year. For this reason, it’s often beneficial to wait out this holding period to achieve better tax treatment.
Alternative Minimum Tax (AMT)
Whenever you’re looking at ways to limit a hefty tax bill, you also need to look at the AMT. The AMT is specifically designed to ensure that high income taxpayers pay at least a minimum amount of income tax. It does this by using an alternative calculation that eliminates certain tax preference items, such as gains from the exercise of stock options.
Even if you’ve never had to think about it before, after your company’s IPO, you may become subject to the AMT. You may be able to use tax-efficient investments and other strategies to limit your tax liability. Careful projections and planning with a tax professional who has a firm understanding of the IPO process will be critical.
If you have a high value estate, advanced estate planning is necessary to minimize taxes and allow you to pass as much wealth as possible to those you wish to benefit. A comprehensive wealth management plan will include a strategy to preserve wealth for your heirs or the causes you care about most.
Your company’s IPO could mark the beginning of a new chapter in your life. Developing a strategic wealth management plan that encompasses investment, financial planning, and tax strategy will help you make the most of it. Make a plan today to build the future you envision.
WRP works with our partner, WRP Tax, to provide investment, financial planning, and tax planning with a focus on executives and employees of companies undergoing the IPO process.