By Harness WealthFinances — July 9, 2020

Financial Planning for Employees Before and After IPO

Working for a company that goes public can have life-changing financial consequences. It can also give rise to tax and legal issues that must be addressed proactively to protect and maximize your windfall. 

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Getting professional advice from lawyers, tax professionals and financial advisors is often your best course of action, but it’s helpful to understand some of the key questions you’ll need answers to after your company has an IPO.

Key issues you’ll need to consider include when and how to exercise stock options; when to sell company stock; what tax issues you could be facing; and how to leverage your newfound assets to provide financial security not just for yourself and your household but also for future generations.

When and how to exercise stock options

Your stock options may be vested or unvested.

The first important consideration is the strike price vs. the internal company valuation of your options. If the exercise price exceeds the fair market value of the shares, exercising your options isn’t a smart financial move.

Timing also matters. Exercising options early and meeting long-term holding requirements before your company exits could provide significant tax savings. Exercising options months prior to your company’s IPO filing could allow you to benefit from long-term capital gains rates as soon as you become able to sell company stock after the IPO.

However, exercising options could also result in incurring significant tax liability with no immediate cash proceeds to pay the IRS. There’s also no guarantee the IPO will actually happen, and there’s non-zero risk that your options could go underwater and you could experience a loss.

When to sell company stock

After an IPO, there’s typically a 180-day lockup period during which you can’t sell your company stock. Once the 180 days have passed, you’ll need to decide whether to sell some or all of the company stock you own. Several important factors need to be evaluated in determining when to sell and how many shares to offload including:

Additional reading:

Potential tax issues: AMT and gifting/donation considerations

Several tax issues have already been raised, but there are other issues to consider as well.

Exercising vested options or selling stock shares could trigger the Alternative Minimum Tax (AMT) which makes tax filing more complex and potentially more costly.

Tax savings could also be achieved by gifting stock to family members or donating options to charity prior to the IPO. And long-term tax savings could be achieved through the creation of a tax-advantaged trust, by transferring company stock to a trust before the market value increases, or creating a donor-advised fund to make tax-advantaged transfers to charities over multiple years.

Tax advisors and estate planning attorneys can provide advice on both planning for the immediate tax implications of the IPO and developing a long-term plan to effectively reduce the amount owed to the IRS.

Additional reading: Graduating from TurboTax: Do You Need a Tax Advisor (CPA)?

Investing your windfall

The sale of stock options after an IPO could leave you with substantial assets to manage.

Choosing the right investment products is vital to protecting and growing wealth, but building a diversified portfolio that exposes you to the right level of risk is only the beginning. Other important considerations include:

Financial advisors can provide assistance in determining the appropriate mix of assets to invest in, while tax and legal advisors can help you develop a smart tax strategy and make plans for the future.

Additional reading: Investment Strategies for a Large Windfall or Inheritance

Make sure you’re prepared for your company’s IPO

It’s advisable to begin planning as soon as you have reason to believe your company will go public, as there are many steps you will need to take before the IPO happens, as well as planning for actions you’ll need to take right after the event.

Harness Wealth can pair you with the advisory firms you need to provide advice across your financial, tax, and legal concerns throughout the IPO process. To identify the right advisory firms for you, get started here. 

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