Making it to IPO is the hard-earned, highly sought marker of success that employees of high-growth startups hope for, which is why it can be a time of both great excitement and stress. Over the longer-term, many people consider what it feels like to work for a public company (more investor scrutiny, and a focus on quarterly earnings), but in the near term the focus is often on monetizing employer stock.
It’s also important to understand that while IPO and M&A are both paths to a successful startup exit, IPO transactions place much more responsibility on each employee. This is because with M&A, the entire company is likely being purchased by a single buyer, and the share price and timing are defined in the deal. In an IPO, however, only a portion of the company is being sold to (many) new investors, and each employee is responsible for deciding when (and at what price) to sell their stock.
Don’t take stock grants for granted
One of the most important things you’ll want to do is to gather all of the information on any stock grants you’ve received. The reason this is so important is that it’s not uncommon to have more than one stock grant, or to receive more than one kind of stock (i.e. options, restricted stock, etc.)
You’ll want to make sure that you have a copy of each stock grant, as well as a copy of your employer’s shareholder plan. Each grant is specific to you, and that’s where you’ll find how many shares you are eligible to receive (or purchase), over what period of time they vest, and the expiration date. In the shareholder plan, you’ll see the rights (and obligations) of all shareholders, including methods of payment for buying your options.
Also, if you anticipate leaving the company, you may have to exercise (i.e. purchase) your options within a short window of time after departure (often within 90 days, but you’ll find this in the shareholder plan document).
It isn’t all, or nothing
One of the most common misconceptions that people have is taking an all or nothing view towards buying (or selling) their employer stock. The reason it’s so important to develop a thoughtfully crafted plan to monetize your stock over time (not all at once) is so that you can optimize for both investment value as well as tax efficiency.
Far too often, people will solve for one at the expense of the other, which usually isn’t an ideal outcome. Even though the tax code is prescriptive (we’re all bound by the same rules), which type of tax treatment you’ll receive is determined by the timing of when you purchase and sell your stock. If you qualify for long-term capital gains tax treatment rates top out at 20%, while gains treated as ordinary income can be taxed at up to 37%, so there’s a lot at stake in getting this right.
Implementing an investment strategy
As you plan your own “exit”, you’ll want to keep in mind how much of your money will be tied up in employer stock, and for how long. Even after IPO when your firm’s stock is now “liquid” (i.e. freely tradable by the public), employees typically have a holding period before they can sell their stock. In order to generate strong demand for IPOs, banks need a track record of their deals performing well (i.e. share price increases after IPO), and employees selling large amounts of stock shortly after an IPO could put downward price pressure on the firm’s stock.
It’s not uncommon to end up with a large concentration in employer stock after an IPO, and as you progress in your career and receive new stock grants this will increase unless you take action. Ultimately, the goal of your employer is to tie compensation to company performance, NOT to tie your financial fate to their own. Why is that? Because too much concentration in employer stock can lead to financial stress that negatively affects your job performance.
You’ve worked exceptionally hard to get where you are, and with a lot at stake, financial advice from a trained professional can be highly valuable.
Want to learn more about how to make the most of an employer stock windfall? Download your copy of our free guide: Employer Stock 101.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.