Key Financial Planning Considerations When Your Employer Is About To Go Public

March 19, 2020

Working at a company that is about to issue public stock (an initial public offering, or “IPO”) for the first time can be exhilarating. While many clients report higher workloads, they are usually excited about the potential to grow their personal wealth thanks to the company stock they are about to receive.

While an IPO is a time of great celebration, it’s wise to start preparing for potential lifestyle changes and ensure you take steps to maximize your financial benefits. Here are some important considerations:

1. Immediate restrictions on the sale of stock: Once your company goes public, it will likely impose a lockup period. A lockup period protects against a steep drop in the stock price by prohibiting employees from suddenly selling their shares of company stock for up to six months or longer. This is especially important to know if you were planning to fund your financial goals with the proceeds of company stock sales. If you are designated as a “key employee,” you may also be subject to blackout periods and trading restrictions that make it even more difficult to liquidate company stock. Key employees are considered to be “insiders,” and this designation does not just apply to C-level employees nowadays. In order to sell shares, you will probably need to create a 10b5-1 trading plan that spells out when you can sell shares within a certain period of time. The sale of company stock will be tied to a predetermined formula, such as a specific number of shares at a certain share price or above.

2. Concentration and diversification: If you own considerable amounts of company stock, you face the risk of over-concentration. This happens when your company stock represents at least 10%-25% or more of your total net worth. While there will be various tax consequences when you exercise stock options or sell company stock, that should not stop you from diversifying your holdings as soon as possible. Many people make the mistake of being over-concentrated in company stock, especially those in C-level positions. These executives often believe in their company strongly, don’t take the time to create a trading plan, and assume way more risk than is generally advisable.

3. Know the funding needs of your financial goals: While an IPO may increase your net worth considerably, that does not mean you can stop paying attention to your financial planning goals. If fact, the receipt of company shares may be a good time to clarify your financial goals and quantify what it will take to reach these goals. If you are subject to trading restrictions, you can create a trading plan that can help you fund more immediate financial goals, while also clarifying what portion of your company stock you are willing to set aside for potential long-term growth and capital appreciation. This is also the time—if you haven’t done so already—to consult with an estate planning attorney who can help you create or update a comprehensive estate plan that aligns with your wishes and values.

4. Revised equity compensation benefits: When private companies are close to completing an IPO, they often will make changes to their equity compensation plans, such as the long-term incentive plans they can offer to their employees once they become a public company. This is important information for you to have for ongoing planning purposes. While you can’t negotiate these benefits, you should take the time to read and understand the new summary plan description and grant award summaries.

5. Expect share price volatility: Shares of many newly-public companies often experience high volatility. There have been numerous examples of this with some highly anticipated IPOs over the past few years. While market volatility can have a significant effect on the value of your company stock, these fluctuations are normal and an integral part of owning stock over the long-term. As long as you plan and set your expectations appropriately, you may have a rewarding company stock ownership experience over the long-term.

Is your employer preparing to go public? Reach out to me if you have any questions about the financial planning process or schedule an introductory call.