The Decisions That Come Before Your Company’s IPO

Friday I said this letter would cover a different clock. The one that starts when a company files to go public.

To sell its shares to the public in the U.S., a company files a registration statement with the SEC. For a U.S. company that’s usually a Form S-1. A company can send a draft to the SEC in private first, but the filing has to become public at least 15 days before the roadshow, when the company formally pitches its shares to investors. So by the time you can read it, the first trade can be only weeks away.

I’ve worked with people through an IPO several times. Those weeks go fast. These are the decisions I’d look at first, in the order they come.

Read the filing. It’s public, and it describes the lockup, the agreement that keeps insiders from selling for a while after the IPO. Then read your own award agreements. They say what happens to your RSUs and options when the company goes public.

Stock options come first, because the IPO changes the math on exercising them. Before the IPO there’s no public market price for your shares. After it there is, and it moves every day. With nonqualified options, the gap between what you pay and what the shares are worth when you exercise counts as income, taxed like pay. With incentive stock options, exercising generally adds no regular income, but the gap can bring on the alternative minimum tax that year, even if you sell nothing.

Exercising before the first trade can mean a smaller gap, if the value used before the IPO is lower than where the stock trades after. For incentive stock options, it also starts the one year holding clock sooner. But it means paying cash, and maybe tax, for shares you can’t sell yet, in a company whose price nobody knows. If the price falls after you exercise, the tax on the gap can stay. Both choices can make sense. The early one ends at the first trade.

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 the year you get them, taxed like pay. If years of grants settle at once, all of that income lands in one tax year. Your award agreement says when.

Withholding is an estimate, not your final bill. Your employer can withhold federal income tax on that income at a flat 22%, and must use 37% on the part of supplemental wages above $1 million in a year. If your bracket is higher, the rest is owed with your return, and a big payout can call for estimated payments before then.

Then the lockup. Employees and other insiders are usually asked to agree not to sell for a set period after the IPO, often 180 days, and some lockups release shares in stages. So part of the tax on your RSUs can come due before you’re allowed to sell a share.

When the lockup ends, your company’s insider trading policy decides when you may sell. An open window is company policy. The law is separate. If you know something material that the public doesn’t, you can’t trade on it, open window or not.

A 10b5-1 plan is a written schedule of sales, set up in advance. It can protect you only 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, sales under a plan can’t start until 30 days after it’s adopted. For directors and officers it’s at least 90 days, and up to 120. If you want to sell soon after the lockup ends, the plan has to be in place well before. Your company’s policy decides whether and how you can use one.

Then there’s the biggest decision, and nobody gives you a date for it. How much of one company do you want to own? If a big part of what you own is your company’s stock, one price can move everything you’re planning. I learned that at 21, with almost everything in one stock. How much to keep is your call. I’d make it on purpose, before the first sale, not by default after it.

I put the stretch from the IPO to your first sale on one page, with the questions to answer before you sell. bfawealth.com/guides/ipo-lockup

If you’re in the U.S. and your company has filed to go public, or you’re waiting out a lockup, book a Checkup. It’s free and takes fifteen minutes. bfawealth.com/checkup

Talk Friday.

Mateo

P.S. If a coworker is waiting on the same IPO, send them this letter.