In the year leading up to an IPO, there is a lot that needs to take place in order for a company (and its stock) to hit the ground running after going public. Often this entails institutionalizing organizational processes and functions, or put more bluntly, trying to look more like a corporation and less of a startup.
That’s because as a public company, your employer will now be under the spotlight of public company investors. As a result, there tends to be a greater focus placed upon consistency and short-term results than the longer time horizon more typical among earlier stage companies.
Startup employees also have a lot that they need to take care of in order to achieve an optimal outcome, but with things as hectic as they often are, many of the most important things you should be thinking about can sometimes fall through the cracks.
If your company is planning to go public sometime soon, during the next 12-24 months, or recently completed an IPO, here are the top three things you need to be thinking about:
Tracking all of your stock grants
Despite the fact that employer stock is a form of compensation, the process for issuing stock grants to employees and keeping track of the required paperwork is a far cry from the automated payroll processes most people are accustomed to. Payments of salary are essentially fully automated, bonus and commission payments are variable and thus require some human input, while stock grants tend to be a manual process.
That’s why it’s important to make sure that you’ve got all of the information you need on hand, including your stock grant paperwork and a copy of the shareholder plan, which details the rights and obligations of shareholders.
If you don’t have a copy of your stock grant information, speak to the appropriate contact (HR, finance) as soon as you can. Once the IPO is imminent, things get crazy and it’s harder to get the attention of key functions within your company. What you positively want to avoid is reaching the point of IPO only to realize that your stock was never formally granted to you, because then you might actually not receive it.
Planning your own stock “exit”
Turning employer stock options and restricted stock (or RSUs) into a cash windfall is a delicate balancing act that requires consideration of:
Liquidity (cash required to exercise your options)
Selling at an attractive price
Minimizing taxes
It’s also important to keep in mind that what works best for you may be very different from your coworkers. How come? Because this involves considering the current financial situation of your household, including how much cash you have on hand, any important uses of cash (like an upcoming home purchase), and the tax bracket you’re in.
Remember, if you haven’t updated your financial plan to take consideration of all three items, it’s highly likely that you’re solving for one at the expense of the others. Here’s why:
If your decision is based solely on taxes, that means selling your stock on/after a certain point in time, for an unknown stock price (not the same price as today, with lower taxes).
If your decision is based solely on selling at an attractive price, it can lead to much more of your windfall going to taxes.
And finally, if the only consideration is how much cash you have on hand, and how long it may be tied up, you aren’t optimizing for taxes or selling at the right price.
Employer Stock 101
Again, if this seems like a delicate balancing act of competing interests, that’s because it is. Ultimately, there tends to be a very wide range of outcomes even among two employees who arrived at their firm at the same time and received the same amount of stock.
That’s why it’s important to make exercising your stock and turning it into a cash windfall part of your financial plan, which includes all aspects of your current (and expected) financial situation.
Download our guide, Employer Stock 101, to learn more about how to make the most of your employer stock options, restricted stock (RSUs), and Employer Stock Purchase Plan (ESPP).
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.
