What Do I Need to Know About Post-IPO Financial Planning?

If your company is exploring options for going public, whether via an IPO or SPAC merger, making the most of the opportunity requires specialized knowledge and careful planning. A fiduciary financial advisor with expertise in the IPO process is a key ally during this time. A trusted expert can help you understand important timelines, decision points, and legal requirements and design a strategy to meet your specific financial goals.

Here are a few key concepts that are important to understand as your company moves toward offering shares to the public.

83(b) Election

If you receive restricted stock or exercise stock options early, then you may choose to file an 83(b) election within 30 days of the grant or exercise. Doing so allows to you to report the paper gain on your stock acquisition taxable before the stock vests. This can be advantageous in the event that your company’s share price later increases, since you would be taxed on a lower-value asset.

Filing an 83(b) election isn’t always advisable, however. It requires you to pay both the tax and any strike price early, well before you will be allowed to sell any of your shares. It’s also important to remember that even if your shares seem to be a tremendous bargain, any investment is a gamble, so it’s important not to bet more than you can afford to lose. If the stock price decreases after your 83(b) election, you will not be entitled to a refund of the tax you overpaid.

Lockup Period

After your company’s stock hits the public markets, it’s unlikely that you’ll be able to sell any of it right away. That’s because SPAC mergers and IPOs typically include a lockup period, during which employees and other pre-IPO shareholders are prohibited from selling their shares. During this time, you’ll need a financial plan that helps you ride out this period of illiquidity. Lockup periods often last six months but can range from just three months to a year.

The lockup period can be a tense time for pre-IPO shareholders as they watch the movements of their company’s share price. Its purpose, however, is to protect the value of your company’s shares. If everyone in your company sold their shares on IPO day, it would almost certainly have a depressive effect on the share price. By setting aside several months for the public markets to work out the share value on their own, underwriters prevent this obvious pitfall.

Many underwriters are starting to allow employees to sell a percentage of their vested shares earlier. Some allow 10% on the first day of trading, and 20% after the release of the first earnings. Having a plan in place to deal with these choices is important.

Blackout Periods and the 10b5-1 Trading Plan

Even after the lockup period expires, you can still be prohibited from trading your company shares during blackout periods. These are stretches of time during which people who have material, nonpublic information about a company are barred from trading its shares. It is possible, however, to make trades during a blackout period if the trades are appropriately planned in advance.

A 10b5-1 trading plan allows you to make trades while avoiding any appearance of illegal insider trading—even during blackout periods. In creating it, you preschedule specific stock trades at a time when you do not have access to material nonpublic information about your company. As a result, you eliminate the chance of being influenced by such information in making your trading decisions. Planning for future trades can be tricky, however, so it’s important to work with an experienced investment professional when developing your 10b5-1 plan.

Tax Planning

With newfound wealth comes more complex tax planning. Depending on the type of shares you own, meeting certain holding periods can limit your tax obligation. You may also become subject to the Alternative Minimum Tax (AMT), which eliminates certain exclusion items for high-income individuals. A knowledgeable tax professional with IPO experience can help you minimize the impact of the AMT and ensure that you’re aware of important holding periods and deadlines.

Having a financial plan in place before IPO day will make it easier to meet your financial goals and avoid common pitfalls that can result in unnecessarily high tax bills. WRP provides comprehensive wealth management, including IPO planning, investment management, financial planning, and tax planning, for pre-IPO employees like you. For more important insights to help you prepare for your company’s IPO, check out our blog.