My Company is doing an IPO: How do you manage your financial situation when your company goes public

When a company goes public, it's a very exciting time for employees. But there are a lot of financial decisions to make, including complex regulations, vesting schedules, and tax implications. It's a wise idea to have a fee-only financial advisor who can help you navigate the process and make sure you're taking the right steps. If your company is going public soon, here's what you need to know to ensure healthy finances.

What is an IPO?

IPO stands for Initial Public Offering. When a company goes public, it means that it's selling shares of itself to investors on the stock market. This can be to raise capital, to pay off debts, or to let employees and private shareholders cash in on their investment.

Before your company goes public, employees may either earn or be given the opportunity to buy shares at the IPO price, which is usually lower than the price that the shares will eventually be sold for on the stock market.

What's the difference between RSUs and private-company Stock Options?

RSUs are a type of equity compensation that grants the recipient the right to receive a specified number of shares at a later date. Unlike stock options, RSUs are subject to a pre-determined schedule and conditions, and they cannot be sold or transferred before they vest.

Stock options, on the other hand, mean the holder is eligible to purchase a specified number of shares at a set price on a future date. Options usually vest over a period of 3-5 years, and at that point, the holder can exercise the option to buy the shares.

Both RSUs and stock options can be extremely valuable forms of equity compensation. If you're looking for immediate ownership of stock, RSUs may be the better choice. However, if you're hoping to buy a stock at a specific time and hold the position for maximum profit, stock options may be more advantageous. Whichever route you choose, do your homework and consult with a financial advisor to ensure you're making the best decision for your needs.

How will going public affect my compensation?

Going public shouldn’t have any direct impact on your paycheck. However, if your company offers equity compensation in the form of restricted stock units (RSUs) or stock options, vesting may occur. This means you've earned the right to ownership of the shares in question. This can lead to a significant increase in your overall compensation. Although a company's stock price will be determined by a number of factors—like overall market conditions, company performance, and investor sentiment—going public can boost the value of the shares.

However, it is important to keep in mind that vesting can also lead to taxes being owed on the shares in question. As a result, going public can have both positive and negative impacts on employees' finances.

What are the tax implications of going public?

There are different types of equity, and each one has its own tax implications. Depending on the type of equity you hold, you may be subject to different tax rates and schedules, or even shift tax bracket.

Firstly, if you own RSUs, you may be subject to taxes when the shares vest. This is because RSUs are considered "income" for tax purposes. The amount you'll owe will depend on a number of factors, including the value of the shares at the time they vest and your personal tax rate.

Secondly, if you own stock options, you may be subject to taxes when you exercise those options. Taxes are not typically owed just by being given the options, but mismanagement of exercising a grant and selling the shares can result in a larger-than-necessary tax bill.

Thirdly, Restricted Stock Awards (RSAs) are subject to taxes when they vest. However, you may elect to make an early 83(b) election, which would allow you to pay taxes on the shares at the time of grant instead of when they vest. This can be beneficial if you believe the company's stock price will increase over time, as you already paid tax at a lower rate.

The tax implications of going public can be complex, so speak to a financial advisor with a specialized tax certification to ensure you understand the implications before making any decisions.

How can I diversify my compensation package?

If you're worried about putting all your eggs in one basket, you may consider diversifying your compensation. This means you'll receive income from a variety of sources; like salary, bonuses, and equity.

Diversifying your compensation can mitigate the risks associated with any one particular form of income. For example, if your primary source of income is salary, you may be at risk if your company goes through a round of layoffs. But if you receive equity compensation as well, you'll have a stake in the company even if your salary is cut. As a result, if your income decreases, you may be better positioned to weather it.

Of course, diversifying your compensation package won't necessarily protect you from all risks. For example, if your company's stock price plummets, the value of your equity compensation will likely decrease as well. However, diversification can help reduce the overall risk of your compensation package and secure your financial future.

What are the risks and rewards of going public?

There are a number of risks and rewards associated with going public. On the positive side, going public can significantly increase the value of your equity compensation. It could provide a boost to your career, and you may be able to take on a more senior role within the company.

On the downside, going public can incur increased scrutiny from shareholders, analysts, and the media. Additionally, it can lead to a loss of control over the company. This is because shareholders will have a say in major decisions, like appointing the board of directors. Going public may be a calculated risk for some companies, but if performed correctly it can be greatly rewarding for employees and shareholders.

When can I sell my shares if my employer does an IPO?

After a company goes public, shareholders are generally subject to a lock-up period where they cannot sell their shares. The rationale behind this is to prevent insiders with intimate knowledge of the company from selling off shares and destabilizing the stock's price. Usually, the lock-up period lasts 90 to 180 days, but it can vary depending on the company. Many companies have blackout periods around earnings reports or other important events when insider trading is prohibited.

After the lock-up period ends, shareholders can sell their shares, but there is no right or wrong time to sell - it depends on your individual circumstances and risk tolerance. For some, it makes sense to sell a pre-determined amount of stock each quarter regardless of the share price. Others might only sell if the stock reaches a certain price target. Got personalized financial advice is crucial at this point.

What should I do if my company is going public?

If you're employed by a company that is going public, there are a few things you should keep in mind. Firstly, your equity compensation may vest sooner than it would have otherwise. This is because companies often accelerate vesting schedules when they go public, or in the event of a change in control of the company (such as a merger or acquisition). In that case, unvested shares may vest immediately.

Secondly, you may be subject to higher taxes if your company goes public. This is because RSU equity compensation is taxed as income not capital gains. As a result, you may want to hold off on selling your shares until you have a better understanding of your tax liability.

Finally, paying close attention to the company's stock price and any news or rumors can be a distraction from your day-to-day business. While it's important to monitor your equity compensation, don't let it become an obsession. A fee-only financial advisor can help you stay focused on your long-term professional and career goals by providing impartial advice on what is best to do with your equity compensation.

Bottom line

Seek advice from a financial advisor about your options if your company is going public. They can help you understand the risks and potential rewards of investing in IPO shares. Employees shouldn't blindly invest in their company's IPO just because they can do so. You need to weigh the risks and rewards to determine if it's the right move. It can also be a good opportunity to take a close look at your financial situation and make sure you're positioned for success.