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Let’s quickly divide this into 3 periods: PreIPO, IPO, and PostIPO. Each timeframe, I’ll address the most important thing…How this affects you and what to do about it?


PreIPO:
COMPANY
An Initial Public Offering, is where a company is first traded on the public market. There’s also a timing element when companies decide to go public. Companies will often wait till the market is healthy and investor optimism is high to get the highest valuation possible. When the time is right, they’ll make the decision to go public. Companies will want to be valued higher at the IPO than its most recent valuation—so that the most recent investors are turning a profit. Until the likelihood is high to be valued higher, the company will most likely remain private.

But how does this affect you as an individual?

YOU
Up to this point, you probably haven’t had much control of the company, if any. This is where your lifealtering decisions begin as we address what’s actually in your control. Whether you have stock options or RSUs, you need to start by creating a plan. It is essential. If there’s one thing you get from this article it’s this…Hope for the best, plan for the worst. Here’s the financial framework that I created to help you make any financial decision, and it’s especially true for IPOs.

Step 1: Values and Goals
Step 2 Risk Tolerance & Capacity
Step 3 Financial Merit & Taxes


IPO
COMPANY
This is the IPO paperwork, known formally as the S1. When a company files their S1 this signals to the public and investors that the company is actively pursuing an IPO. It’s only a moderate indicator of an IPO around the corner. There’s one more thing that companies will do before actually going public. Companies often do a complete restructure of their equity plan to become more competitive in the public markets. This has all led up to the big day—the Initial Public Offering. The company is officially public!
But what does this all mean for you?

YOU
When the S1 is filed, it’s public information so you’ll know your company is serious about going public. If you’re an executive, the filing of the S1 begins a timer for the company’s management team where they aren’t allowed to express any opinion on the value of the company—This is known as the Quiet Period. You may also need to create a 10b51 Trading Plan—which protects you from insider trading accusations. If you’re able to exercise your stock options, I’d seriously contemplate waiting. When your company IPOs, it’s unlikely you’ll be able to sell your stock. Waiting would be prudent here until you’re able to actually sell your stock.

Something to note is that the tax rules don’t change surrounding your equity just because of an IPO. RSUs still have OI upon vest, and stock options will have to report the spread on exercise as either OI, or as an AMT adjustment.

PostIPO
COMPANY
The lockup period is a time frame where you’re restricted from engaging in transactions with the stock—typically 180 days long. If you’re lucky, it could be shorter. Sometimes they restrict your ability to pledge, transfer, offer, or exercise your stock options, but most of the time, they disallow you from selling your company stock. It’s important to note, that if you can exercise during the lockup, taxes aren’t delayed until post lockup. They’re often due sooner.


YOU
Once the lockup is complete, it now makes sense to look at the stock price. If you’d like to exercise some of your stock options, you’ll want to ensure that your options are above water (or inthemoney). As you make decisions around exercising and selling, you’ll want to ensure that you’re aware of trading windows and blackout periods where you’re not allowed to trade.

When you do sell, you can be strategic about what shares you sell to reduce taxes. Your shares will likely have different cost basis and holding periods. If you’re in a high income tax bracket year it may make sense to sell high cost basis stock with longterm holding periods. To the contrary, if you’re in a low tax bracket this year, you could consider selling low basis stock with shortterm holding periods if it aligns with your unique goals.

Whether you made it big in the IPO or not, just remember that the wedding (IPO) is just the start of so much good to come.


0:00 1:43 Intro
1:43 3:01 What the company does PreIPO
3:01 10:46 What YOU should consider PreIPO
10:46 14:34 What happens at the company during the IPO
14:34 17:48 What YOU should consider during the IPO
17:48 20:37 What the company does PreIPO
20:37 24:42 What YOU should consider PostIPO


#IPO #GoingPublic #investing
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