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March 5, 2021
Working for a company that goes public is a critical moment for both you and your finances. Timing is very important as it relates to your financial, tax, and legal situation.
Consider when and how to exercise stock options, sell stock, and what tax implications these have. How do these issues tie in with your other investments? What does this mean for my long-term goals?
The exact date of the IPO can constantly change but if you have some level of confidence about when it is going to occur, it is good to plan for your benefits.
Assess your equity compensation position as the IPO date approaches. Your stock options will be either vested, or unvested. Your company should provide you with a vesting schedule to see what you own, and what you will own in the future. The IPO may involve immediate vesting as part of its terms, which may result in a year of abnormally high income and tax consequences. If you have a plan, the consequences can be minimized.
Exercising your options early may be better from a tax perspective. By exercising before the IPO and receiving the resulting stock, you may be able to benefit from a long-term capital gains tax rate if you want to sell once the company goes public. Usually, there is a 180-day lockup period after an IPO when you cannot sell your company stock.
It is not a good idea to be heavily invested in one company. If the company experiences hard times, a significant portion of your assets are in jeopardy. For better security, diversifying your portfolio is necessary.
If you want to create a trust for estate planning purposes, it is best to put assets into it at their lowest possible value, which is likely before the IPO. This is because the value at which you transfer the stock into the trust will decrease your estate tax lifetime exemption amount.
After going public, you may experience a windfall of new assets to manage, and there comes more questions.
Your company may have immediately vested all the stock they have granted you. You will want to prepare for the large tax consequences of this event.
Diversification is still a concern after the IPO. Determining how much of your gains you want to protect is an important thing to ask.
There may be a period of time when you are restricted from selling the stock based on when you exercised your options. Also, there is typically a 6-month time period when you are restricted from selling the stock after the IPO. Even after, there may be restrictions on certain insiders about how they may sell their stock.
Navigating the IPO process is better with a professional plan. Experienced financial planners, tax advisors, and attorneys can help you make the most of what you have made with the company and also educate you on what is likely to happen.