Is Your Company Nearing an IPO? It’s Time to Plan

Does the following scenario sound familiar? You work as an executive at a private company and the business has grown so much that the founders are now contemplating an initial public offering (IPO). 

You knew this big day was coming, but now that it’s near, you start wondering about things to consider and planning moves to make. After all, you’ve earned valuable stock grants over the years as part of your executive compensation, and it’s time for some important decisions. Let’s walk through it to see how you may wish to approach next steps.

What’s an IPO?

As a private company deepens and expands its operations, it may reach the point where continued growth becomes challenging without a sizeable infusion of capital. Sometimes the company founders will secure their own financing to help grow the business, but it’s not always desirable or even possible. That’s when an IPO may come into play.

With an IPO, the private company offers shares of its business in the public markets. It will typically engage financial institutions with underwriting expertise related to bringing private firms to market, navigating the legal, accounting and regulatory requirements; setting the optimal IPO timing and share price; working to promote the IPO and find viable investors; and much more.  

By taking their company public, the owners can gain greater visibility and credibility, while attracting talent and unlocking new avenues for growth. The trade-offs include relinquishing some control of the business, facing public scrutiny and making regular disclosures, and incurring costs related to maintaining public market status. 

Understanding stock grants

Companies award equity compensation like stock grants to entice and retain senior-level talent, and to align the interests of executives and the company. If the company performs well, the executives are financially rewarded.

With an upcoming IPO, what will happen to your stock grants? If you have worked at the company for some time, you’ve likely amassed a large amount of equity compensation that could represent a financial windfall for you when the IPO hits.

Before deciding what to do with this money, you should understand the basics of how stock grants work and what factors you need to consider:

• Types of equity compensation. Stock grants may include restricted stock units (RSUs), incentive stock options (ISOs), non-qualified stock options (NQSOs or NSOs), or actual shares. Each type may have different tax consequences and different planning requirements. A Corient Wealth Advisor can help you plan effectively based on your grant type and personal circumstances.
• Vesting schedule. As part of its talent retention strategy, a company usually won’t award shares that can be sold immediately. Instead, it may take years for the shares to vest (i.e., the employee fully owns them). For example, if you receive 800 shares, 200 may vest on the first anniversary of the award, and then another 200 shares for three successive years. Be sure you know exactly what you own and the specifics of your vesting schedule.
• Lock-up period. It’s common for companies to impose a lock-up period (e.g., 180 days after the IPO) when employees who are deemed as company “insiders” cannot sell their shares. This restriction prevents a significant sale of stock immediately after the IPO that could negatively impact the share price.
• 10b5-1 plan. If you hold material non-public information about the company, you may be considered an insider who could use this privileged info to make stock trades for financial gain. Avoid the issue by setting up a 10b5-1 plan before you hold material non-public information. It lets you trade shares based on a specific schedule without contravening SEC insider trading rules.
• Stock options. This form of equity compensation conveys the right to buy company shares (up to a set number) at a pre-determined price over a specified time period. The purchase price is usually attractive, giving employees a chance to sell the shares at a profit once the company becomes more valuable or is either acquired or participates in an IPO. If you hold stock options, know all the details about vesting and divesting of shares, so you can make informed decisions.

Deploying the proceeds of stock grants

Equity compensation can be complex for executives in a private company, particularly if an IPO takes place. Before we look at the sophisticated planning you’ll need to help maximize your stock grants, let’s consider a few common ways of using the grant proceeds:

• Paying down or retiring debt
• Investing in public/private securities or real estate 
• Starting a business or investing in an existing one
• Helping family members via financial gifts/trust funds
• Earmarking money for philanthropic and legacy purposes
• Saving for retirement and ensuring sufficient, sustainable cash flow

It’s critical to implement a sound approach for deploying your IPO-related generational wealth through a strategy that establishes (or confirms) your key lifestyle and family priorities. With such a strategy in place, your Corient Wealth Advisor can better customize planning to match your needs.

Proactive planning is key

A comprehensive wealth plan is multi-faceted, addressing investments, tax minimization, estate planning/wealth transfer, goal planning (including retirement), and more. A good plan also covers detailed income and cash flow projections to help ensure your money will be readily available to meet your financial needs for life. 

Planning is especially useful if you’re an executive holding company stock, as much of your wealth may stem from those shares. You could be susceptible to “concentration risk,” which means you’re unduly linked to the fortunes of a single company. If the business struggles and its share price plunges, your net worth could decline sharply. Investment planning keeps your portfolio adequately diversified to enhance your overall risk-return profile. 

For example, exchange funds are one strategy that can be used to reduce concentration risk. An exchange fund allows a number of investors to pool their concentrated positions in stocks that have appreciated in value. This private investment vehicle gives each investor pro-rata exposure to a diversified portfolio without triggering an immediate taxable event. Other tax-efficient investment strategies include long-short direct indexing, variable prepaid forwards, options overlays, and qualified opportunity zone funds. Your Corient Wealth Advisor can assess whether your portfolio may benefit from any of these sophisticated strategies.

Advanced tax planning helps preserve your wealth by using established tools to lower your tax obligations. This planning includes a tax-loss harvesting strategy where you sell certain security positions at a loss if you’ve realized significant capital gains in the same tax year. These losses may help offset the gains and result in reduced taxes. As well, proactive estate planning focuses on early intergenerational wealth transfer to help minimize estate and gift taxes.

If you have trust needs as part of your wealth plan, we offer bespoke trust services through Corient Trust Company of South Dakota – a chartered trust that operates under a direct trust model. A directed trust may be customized to suit your distinct family, investment and estate planning needs, and can be integrated into your holistic wealth plan. South Dakota trusts offer multiple layers of asset protection, highly favorable tax treatment, and unlimited duration for dynasty and purpose trusts. 

Take action now

If you’re an executive at a private company who holds stock grants, an IPO creates opportunities as well as potential risks. Corient Wealth Advisors have the knowledge, skills and experience to guide you through the IPO process and what you need to know and do. Contact us today.

ABOUT THE AUTHOR