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< Tech Industry
March 30, 2021
No one knows, to put it simply. Owning pre-public company stock is always a crapshoot. Depending on how early you joined, you may or may not have already made your fortune. Regardless, the IPO event means your stock will have value on the open market which does not necessarily mean that now you’re headed for the stars.
Usually, stock options or other stock-based compensation will vest according to a schedule. However, it is common for an IPO to trigger vesting of all stock grants. Depending on the definition of the trigger, the stock may be subject to either complete vesting or accelerated vesting at the time of IPO, or for some time such as six months following the IPO. If you find out you will be taking ownership of more stock than expected for a particular year, this may result in a larger tax bill.
Following the IPO, there is usually a period during which employees are prohibited from selling their shares. This is so that founders, insiders, early investors, and employees do not sell too much stock into the market in conjunction with the IPO. Typically lasting 90-180 days, the lockup period may last as long as six months depending on the terms of going public. Historically, the average six month return on IPOs has been negative from 2000 to 2016. Being subject to a lockup period means you cannot take advantage of the surging price on your company’s debut trading day.
Everyone is hoping for a pop on IPO day. Especially for tech companies, there are countless stories of millionaires being made. During this time, it is important to recognize that this is extremely uncommon. Even for unicorn companies such as Facebook, factors beyond the company’s control caused its stock price to fall in its first few months of trading back in 2012. Our advice is to remain objective of your financial situation in the midst of an IPO. You should not depend too much on the success of your company when a majority of your net worth is invested in its stock. Compared to a diversified mutual fund or ETF, holding too much in one stock is very risky. Strategies to preserve your wealth during this time of uncertainty should be implemented to some degree.
Speaking with a financial planner can help solidify your decision on what amount of stock you are comfortable with selling, and when to sell it. Beach House Wealth Management frequently works with employees of pre-IPO tech companies with these issues. Over the years, we have developed strategies that may apply to you. Book a free initial consultation with one of our planners for advice on your upcoming IPO.