Upcoming IPO? Four steps to take when your company goes public

Taking a company public is an exciting step for everyone involved in the business.

A public offering can unlock new growth for the company. It also can unlock and expand the balance sheet of founders, investors and employees. As with any new source of wealth or liquidity, you need a plan to make the most of your opportunity.

If your company is approaching an initial public offering, take these four steps to maximize the impact for you.

1. Identify Your Goals

An IPO can metamorphize your financial picture. This can be thrilling and overwhelming at the same time. As a result, it is important to ground yourself by identifying your goals. You should think about your goals in three categories:

• Short-term goals. Are there purchases you would like to make once you can sell your stock? Do you want to move, buy a house, complete renovations, or pay off debt? By identifying your immediate needs and desires, you can formulate a stock sales strategy to provide the necessary liquidity while prioritizing against your longer-term goals.
• Longer-term goals. Do you have a long-term financial plan for your retirement, education funding or estate planning? Would you like eventually to start your own business, change your career path, or have a philanthropic impact? These types of long- or immediate-term goals require careful planning. That starts by identifying your goals. You can then calibrate a diversification and investment strategy that aligns with your future priorities.
• Business investment. Whatever your role in a company, it’s common to want to hold onto a significant portion of your stock after the company goes public. This may be tied to your role in managing the company. You may simply want to stay all-in. If one of your goals is to remain invested in the company, it is important to acknowledge that up-front. You may need to balance that goal against your short- and longer-term financial goals. Also, your tax and investment strategies will shift when dealing with stock you plan to hold for the long term.

2. Know Your Restrictions and Requirements

Most companies impose lock-up periods after an IPO. This typically restricts insiders from selling their stock for 90 to 180 days following the IPO, or until a specific event (e.g., earning release, target share price, multi-stage release). Such restrictions also may apply to former employees. These restrictions generally set the timetable for when you can begin to sell your shares. If you need cash earlier, you could consider borrowing against your stock or a sale in the secondary market before the IPO. But both carry risk and expense.

In addition to considering lock-up periods, you need to be clear on what you own. Equity interests in a company may include unrestricted stock, restricted stock, restricted stock units, incentive stock options and non-qualified stock options. You also may own different classes of stock or preferred stock versus common stock. Your steps, requirements and expectations will differ depending on what you own. Your tax consequences and strategies also will change.

For example, if you hold options, you will need to think through when to exercise them in relation to the swings in value a company often experiences around an IPO.

If you need liquidity and don’t have the funds to exercise your options, you might consider a “cashless exercise.” Under this strategy, you would use a broker to fund the exercise (i.e., purchase) and immediately facilitate the sale of the shares. Part of the proceeds would pay the fees to the broker. Options also have special tax treatment that requires attention and may have their own required holding periods, in addition to the general lock-ups.

Finally, you need to avoid insider trading concerns. If you are exposed to material non-public information related to a company, you generally have two options to sell your stock. Through a 10b5-1 trading plan, you can engage a broker to sell a predetermined number of shares on a set schedule and avoid implications of insider trading. Alternatively, if you want sales to proceed with greater flexibility, you might consider a blind trust. With a blind trust, the trustee sells shares at their discretion and you protect against insider trading concerns by placing all decisions outside your influence and control.

3. Face Up to the Risk and Taxes

Your biggest risk before and after an IPO is the amount of your wealth concentrated in the company stock. In many cases, until you sell, your wealth goes the way of the stock. Over time, the answer to this risk is to sell and build a diversified portfolio with a range of asset types. How fast and to what extent that happens will largely depend on your attitude toward the risk of your concentrated position. Do not ignore that risk. Instead, decide how you would feel if the stock lost 10%, 20% or 50% of its value. Then, treat your response as a central factor in building the financial plan to achieve your goals.

You also need to face up to the taxes that will apply when you sell your stock. Federal capital gains taxes can be as high as 23.8% and state and local taxes can apply on top of that. It is important to understand you may only walk away with 80% or less of a stock’s sale price. It is also important to consider strategies to mitigate the tax liability. One common strategy is tax-loss harvesting. If you are realizing capital gains, you should consider taking any losses in other holdings in the same calendar year to offset the gains. You also can offset your gains with deductions for charitable contributions.

Another opportunity that is especially pertinent to early stockholders is the qualified small business stock exclusion. If you acquired your stock before the company raised $50 million, some or all your shares may be eligible. This exclusion allows you to avoid tax on the first $10 million of capital gain when you sell qualified stock, and can be multiplied by gifting stock to trusts for other beneficiaries if you live in certain states

4. Take a Wide View of Your Financial Picture

Fully review your overall financial picture as you look ahead. You’re likely to find lifestyle changes, advanced planning needs, and risk management strategies that should be addressed. You need to integrate your strategy for the IPO with a financial, tax and estate plan that can evolve with you over time.

If you don’t have an estate plan, now is the time to create a will, revocable trust and powers of attorney. If your assets exceed $13.99 million ($27.98 million for a married couple), you’ll be exposed to estate taxes at 40%, so you’ll want to think about gifting strategies.

You also should think about the role of philanthropy in your life. Leaders from growing companies have often been the ones to spur innovation in the nonprofit sector, through both their financial support and their ingenuity. Strategic giving can multiply your impact in the same way as an IPO can multiply the value of your stock.