Finally, all of the hard work has paid off. Your organization has a bright future in making the next big step in its journey, and it can be yours too. As we have seen with many startup employees, going public will surely change your finances, especially if you have significant equity. If you are aware of financial planning considerations such as tax consequences, deadlines, vested/unvested shares, compensation negotiations, and rules for the IPO, you can ensure you grow your wealth over the long term and avoid missing out on the full value of your company’s compensation package.
Take It Before It’s Too Late
Startup employees missed out on almost $5 billion in 2020 by not exercising their pre-IPO stock options. It may be the case that they let them expire, left the company before vesting, or had them cancelled on the IPO. As options are often a large part of startup compensation, employees need to know that through inaction, they are giving up free money. Check your vesting schedule, expiration dates, and liquidity to make sure you take what is yours.
It is unclear whether the price of your shares will increase or decrease once they list. An infinite number of factors can affect the price in the first few months. Seemingly valuable companies can cut a price in half for reasons including market conditions, political landscapes, the economy, and capital markets. For example, Lyft and Uber in 2019 had their price halved in the year following their IPO due to initial overvaluation of the market and short-sellers, among other things. From 2000-2016, the average six month return for IPOs were negative. Also, investors and owners looking into pre-IPO companies should understand that IPOs generally underperform broad market indices such as the S&P 500 and Russell 3000 in the long term.
Develop A Selling Plan
How much of your company stock do you want to keep? How much do you need to sell? If you believe in the long term future of the company, you should hold a stake in the company. However, it is a huge risk holding one company as the majority of your portfolio, which is usually the case in what we see with startup tech employees. Usually, we recommend diversifying some portion of the stock based on the client’s preference, short-term cash needs, vesting timeline, and tax efficiency. These factors also should be considered when determining how much to sell immediately, or over time on a schedule.
More Wealth, More Taxes
Before you had a stock plan, your tax planning and preparation process may have been relatively simple. RSUs, stock options, and purchase plans result in an influx of wealth which brings taxes along with them. Immediately, you may have drastically different and more complicated tax consequences due to your plan, especially if your stock takes off after the IPO. In order to minimize taxes, it is important to plan out your taxable income, gains from selling or vesting, and withholdings. Avoiding unnecessary tax obligations, such as the alternative minimum tax, can save you money in the current year, and maximize returns over time.
If your goal is to pass as much wealth as possible onto your family, how you transfer this stock from your ownership to your estate’s can affect its value. Timing, tax considerations, types of accounts, and setting up a trust, are needed again as you plan to preserve wealth for both you and your heirs.
Your company’s IPO can mark a pivotal point in your life. Too many people do not take full advantage of their stock plans, and as a financial planner, it is a shame to see that go to waste. Speak with a planner about strategies for when your company goes public. Beach House Wealth offers comprehensive planning and advice while working with accountants, attorneys, and investment advisors to help tech workers make the most of their plans.