Before Your IPO Lockup Ends

I’m Mateo Dellovo, a fiduciary adviser for people paid in company stock. When your company goes public, the shares you’ve earned over years turn into something you can sell. Usually not on day one. This page covers the money side of the stretch from the IPO to your first sale, and the questions to answer before it.

After an IPO, company insiders, including employees, agree not to sell their shares for a set period. The agreement is with the underwriters, the banks running the offering, and the law requires the company to disclose its terms in its registration documents. Most lockups run 180 days. Some limit how many shares can be sold over a period, and some release shares in stages. Your own release dates depend on the agreements that cover your shares, and your company’s equity team can confirm them.

The SEC notes that a stock’s price may drop as the market expects locked up shares to be sold. It may not. Nobody knows in advance, and the lockup is what it is. The decisions that are yours sit on the tax side and the sale itself.

RSUs granted before an IPO can have two conditions, time and an event such as the IPO. When both are met, the shares are delivered, and their value counts as income for that year, taxed like pay. If years of grants settle at once, all of that income lands in one tax year.

Withholding is an estimate, not your final bill. Your employer can withhold federal income tax on supplemental wages, such as bonuses and vests, at a flat 22%. Above $1 million of supplemental wages in a year, the rate is 37%. Companies can hold back shares, or sell some, to cover it. Even then, the rate withheld can be below your rate, and the difference is yours to pay when you file.

Part of it can be due sooner. If you expect to owe at least $1,000 after withholding, and your withholding covers less than the smaller of 90% of this year’s tax or 100% of last year’s, 110% if last year’s adjusted gross income was over $150,000, or $75,000 if married filing separately, the IRS expects estimated payments. They fall in April, June, September and the following January. One way to avoid them may be more withholding from your pay, with a new Form W-4. The RSU tax gap estimate on this site shows what the gap may be on this year’s vests.

If you hold options, the tax depends on the type. With most nonqualified options, the IRS says you include in income the value of the stock at exercise, minus what you paid. With incentive stock options, exercise generally adds no regular income, but you may owe alternative minimum tax that year, and selling before the end of the holding periods turns some or all of the gain into pay. Shares bought through an employee stock purchase plan have holding periods of their own.

When you sell, the gain or loss is the sale price minus the value already counted as income and anything you paid for the shares. Hold the shares more than a year after they were delivered, and the gain is long term. Sell sooner, and it is short term, taxed like pay.

Even after the lockup ends, company policy can limit when you may sell. Many public companies keep an insider trading policy with trading windows, and the SEC requires each company to say whether it has one. An open window is company policy. Insider trading law applies whether a window is open or closed. If you know something material that the public doesn’t, you can’t trade on it.

A 10b5-1 plan is a written schedule of sales, set up in advance, that can protect you if you adopt it in good faith when you know nothing material that the public doesn’t. For employees who aren’t directors or officers, trading under a plan can’t start until 30 days after it is adopted. For directors and officers, it can’t start until the later of 90 days after adoption or two business days after the company files its Form 10-Q or 10-K for the quarter in which the plan was adopted, up to 120 days. The company’s policy decides whether and how you can use one.

If you’re an officer, a director or a holder of more than 10% of the stock, extra rules apply. Most of your transactions are reported to the SEC on Form 4 within two business days, and SEC Rule 144 can limit how much you can sell in any three month period. Shares received before the IPO can be restricted securities under Rule 144, which carries its own holding period. Your company’s equity team or stock plan administrator can tell you which rules cover your shares.

After an IPO, one stock can become most of what you own. When it does, one price can move your whole plan. The SEC puts it plainly. You’ll be exposed to significant investment risk if you invest heavily in shares of your employer’s stock.

At 21, I had almost everything in one stock, CMGI. I learned early how much one price can change a plan.

How much to keep is your decision. It can help to decide it on purpose rather than by default.

1. Which of your RSUs have settled, and what income did they create this year?
2. What rate was withheld, what might you owe in total, and is any of it due before you file?
3. If you hold options, which type are they, and what would exercising this year do to your tax?
4. When does your lockup end, and does any of it release in stages?
5. When does your first trading window open, and what does your company’s policy ask of you before you sell?
6. Do the officer, director or large holder rules cover you?
7. How much of your net worth will sit in one stock, and how much do you want there?
8. Where does the money go when you sell?