IPO/Going Public
Key things to know/consider/prepare for when your company is going public
What It Means to IPO/Go Public
When your company goes public, it is a form of a liquidity event, and the company's shares will trade publicly on a stock exchange (mostly likely either the NASDAQ or NYSE). In the vast majority of IPOs, your company will also sell new shares as part of the offering, as IPO'ing is primarily a financing event.
IPO's traditionally have multiple steps: (1) Your company hires an investment bank (or banks) to help underwrite the transaction, (2) a registration statement, called an S-1 is filed with the SEC, (3) the investment bank and company management "market the deal" via meetings with public company investors (mutual funds, pension funds, endowments, etc.), (4) deal terms are finalized -> including the price for the IPO deal, how many shares will be sold, and who will buy them, and then (5) the IPO occurs and the company is officially public and trades on a stock exchange.
Once the company is publicly traded, a number of new rules will apply to them (e.g. publicly releasing and reporting their financial results). As an employee, new restrictions will also exist for you (e.g. blackout periods; insider trading rules), but also new benefits will occur (e.g. ability to sell stock frequently, potentially new programs like an ESPP).
Why Do Companies Go Public
Privately traded companies frequently have a number of motivating reasons for going public. The primary four reasons are:
Raise capital for further expansion. As a high-tech company grows, so usually does its need for capital. Public markets are significantly larger (i.e. have multiple times more capital available for investment) than VC/private market investors. At the later stages of a company's life, accessing this larger capital base is materially attractive, and also usually much easier to raise funds from vs. VCs (public company deals can sometimes be completed in days, versus months of a VC-raise process).
Broader investor base. The public market investor base is much larger and broader than private markets. Mutual funds, endowments, pensions, sovereign wealth funds, and retail investors can (and do) invest in the publicly traded company stock.
To create liquidity for shareholders (investors and employees). Investors, founders, and employees all eventually desire/need their shares to be liquid for various reasons. The longer a company is privately held, the greater want/need from those shareholders for liquidity. Companies may try to temporarily solve this via Tender Offers, but being a publicly traded company will eventually need to occur.
Greater visibility/easier to attract new talent. Being a publicly traded company usually increases the company's visibility (i.e. it's easy to research and learn about a company and its financials), and also makes it easier to attract new talent (i.e. shares now have near daily liquidity, which reduces the risk employees take when a material portion of their remuneration is provided via stock-based-compensation).
How an IPO Impacts Your Stock Comp
We wish we could say “this is what will very likely happen to your stock comp." The good news is that going public generally has more rules -> and thus what will occur with your stock comp is much more predictable. But with most things in stock-based-comp, the devil is in the details. At a high level, there are two key factors that will determine most of what is going to happen to your holdings:
Key Factor 1: Type of Equity and/or Stock Options You Own; Vested or Unvested; and Unique Features
Shares of common stock. If you’ve exercised a vested stock option (e.g. an NSO or ISO), you own shares of stock in the company. In nearly all situations, nothing is going to change with this upon going public. That said, you will now have liquidity, so you'll need to determine your divestment/sale plan, which should include your stock holdings .
Vested stock options (ISOs or NSOs). In nearly all situations, nothing is going to change with your vested stock options upon going public. That said, you will now have liquidity, so you'll need to determine your divestment/sale plan, which should include your vested stock option holdings.
Vested restricted stock (RSUs). Vested RSUs are typically the most impacted by an IPO:
If you have single-trigger RSUs (which are very uncommon pre-IPO), in nearly all situations, nothing is going to change with this upon going public.
If you have double-trigger RSUs (which are very common pre-IPO), then going public is going to have a very large impact. An IPO is a liquidity event, which is the "second trigger" of double-trigger RSUs -> and all time-vested shares will now officially vest. There is nuance here as to when the second trigger is officially met (more details below), but all of your "time-vested" RSUs will now officially vest due to the double trigger, resulting in a large amount of realized income and and associated taxation.
Last, you will now have liquidity, so you'll need to determine your divestment/sale plan, which should include your RSUs.
Unvested stock options (ISOs or NSOs). In nearly all situations, nothing is going to change with your unvested stock options upon going public. That said, you will now have liquidity, so you'll need to determine your divestment/sale plan, which should include a plan for your stock option holdings as they vest over time.
Unvested RSUs. Post-IPO, all RSU grants effectively become single-trigger RSUs. No legal change occurs to the grants, but the "liquidity event" requirement for double-trigger RSUs has now been met (and always will be). As such, shares of both single- and double-trigger RSUs will officially vest to you on each time-vesting date.
Key Factor 2: IPO Type/Structure/Terms
Ways/paths of going public
Though more than 90% of tech industry companies going public do so through a "traditional" IPO, there are actually multiple different ways a company can go public:
Traditional IPO. Traditional IPOs are how more than 90% of companies go public. The process involves selecting an investment bank (or banks), who underwrite the process, facilitate the transaction, commit to purchasing shares, and market the deal to a large rolodex of known public market investors. The process is tried and true, but arguably expensive (fees are frequently 2-6% of the transaction).
Direct Listing. In a direct listing, a company sells shares directly to the public. It's much less expensive than a traditional IPO, but comes with tradeoffs such as (1) the company not receiving funding until the public purchases shares, and (2) the deal is not as broadly marketed (and as such, public investors are usually less informed on the company).
Special Purpose Acquisition Company (SPAC). SPACs are unique, wherein a financial group or firm conducts an IPO of a entity whose purpose is to acquire a company. If a deal is consummated, the acquired company becomes publicly traded via that acquisition. Going public via a SPAC can provide a much quicker and easier route to becoming a publicly traded company, but conversely can also be very costly and come with significant uncertainty regarding the ultimate proceeds the company will have when the deal closes.
Note: SPACs were extremely popular in 2020/2021, but have since become quite unpopular due to the poor performance of companies that went public via SPACs and the uncertainty companies have regarding the new capital they'll have if/when the deal closes.
IPO Pricing/Structure/Terms
Traditional IPOs have a number of decisions that are made which have a significant impact on employees and their stock-comp. A handful of the most important ones, and their associated impact/considerations are:
Can you sell shares in the IPO? Some companies only raise new capital, and don't allow any existing shareholders to sell during the IPO. Other companies will do both (raise new capital and allow existing shareholders to sell). There is no rulebook here, but understanding what (if anything) is available to you is important.
When will the "liquidity event" for double-trigger RSUs occur? Companies at times have some flexibility in regards to when the liquidity event requirement of an RSU occurs. At times, it's met when the IPO occurs, and other times it's met when the lockup period expires. If you have significant double-trigger RSU holdings, it's very important that you understand when this will occur and plan accordingly. It's also important to understand what taxation withholding rate the company will use when that does occur, and if you have a choice (i.e. some companies allow employees to choose between the 22% supplemental rate or a 37% rate).
How long is the lockup period? Lockup periods are very common, but not required. Most traditional IPOs have a 90-180 day lockup period, but shorter/longer ones can occur. In less common situations, lockups can be applied to certain investors (e.g. VC-investors; founders; senior management) but not general employees.
What price will the IPO occur at and how many shares will be sold? Both the IPO price and the number of shares is frequently not finalized until 1-3 days before the IPO occurs. Prior to that, a general target range for each is provided, and management holds a "road show" wherein they meet with a large number of prospective public company investors. Thereafter, the company (via their hired investment bank(s)) get indications of interest regarding how many shares an institution would be interested in buying, and at what price. The IPO'ing company analyzes this information to help decide what price they can/should transact at and/or how many shares they will sell.
The stock price will likely change (by a lot) in the days/weeks after the IPO. The IPO price is what shares initially transact for. Thereafter, public market supply/demand determines what the price of the shares should be. It's very common for the share price of a newly IPO'd company to be very volatile, potentially increasing or decreasing considerably in value over the following days/weeks. For more information, see: Average Tech Company Post-IPO Returns
Key Decisions, Considerations, and Risks
Is the IPO Rumored, Announced, or Completed?
IPOs have a life cycle associated with them, and are also heavily dependent on economic conditions and market demand. Company's announcing intentions to go public, or knowing that your firm has filed an S-1 are definitely signs that you should be re-reviewing your stock-comp plan (because liquidity may change). That said, you also need to know--and take into consideration--that your company may ever get there. Companies planning for a "future IPO" may never get there, companies who filed their S-1 may never get there, and even companies who start a road show may find that the market demand isn't sufficient and put their plans on "pause".
Creating Your Selling Plan
Post-IPO, your shares are now liquid, and you now have the ability (outside of blackout periods and lockups) to sell your options/shares for cash. You likely want to start selling--or at least you know you should be--but don’t know how you should go about doing it. You want to minimize regret, and need to balance downside risk, upside reward, your individual financial needs and requirements, and optimize for tax. It's a lot....
At 30-40 Wealth we've helped a large number of individuals develop a tax-smart divestment plan that they feel good about ("no regrets"). We recommend reading our step-by-step guide for key details and planning considerations (because every tech worker should have a selling plan once their company is publicly traded!)
Step-by-step guide: Divestment/Sale Planning
How Much Should You Sell During the IPO (If You're Allowed)
If you're an employee when your company goes public, your company may opt to allow employees to sell a portion of their stock comp holdings in the IPO (only a portion of companies that go public do; usually those which anticipate very strong investor demand for their shares). If you're company is allowing you to sell, most times they institute a cap (e.g. "up to 20% of your holdings"), so you likely already have a maximum pre-set for you. But deciding if you should sell none, the max, or something in between is an important decision.
At risk of sounding like a broken record, this is the time to create your divestment/selling plan. In most cases, the ability to sell during the IPO is just a window to be able to sell earlier than otherwise anticipated, and in our opinion should be considered as part of your group 1: immediate sales bucket.
How Much Tax Should You Elect To Be Withheld On Your Double-Trigger RSUs (If Applicable)
If your double-trigger RSUs will be deemed to have met the liquidity requirement and fully vest on the IPO date, your company may also allow you to choose what percent of your now-vesting double-trigger RSUs they will force-sell for tax withholding purposes, typically a choice between (1) the IRS required 22% supplemental rate, or (2) 37%, the maximum IRS income tax bracket.
The decision depends on the individual, your risk tolerance, goals, and tax plans. But due to how taxation on RSUs works (specifically that the supplemental rate is not enough), we've found that most individuals will be better off selecting the higher rate (which helps ensures that they have the funds to pay the associated taxes they will actually owe).
Can/Should the IPO Change Your Stock Option Exercise Plan
Post-IPO, you will have the ability to sell shares on most days (excepting the lockup period and blackout dates). The availability of daily liquidity is likely to have a considerable impact on how you approach your stock options. There is definitely no one-size-fits-all plan here, but some key items that should be considered are:
What actions does your divestment/selling plan specify? Stock options are absolutely a part of this plan)
What tax strategy have you aligned on for your options? For more information see: 50+ Tax Strategies)
Are you allowed to exercise your options during the post-IPO lockup? In most situations you are, but not all; you should check with your internal stock-comp-team
Do you know if cashless exercises are going to be available to you? The ability to conduct a cashless exercise provides significant flexibility -- which can impact how you approach exercising and selling. Most publicly traded companies offer this capability (via their custodian, such as Schwab or E*Trade).
What New Restrictions and Benefits Will You Have Post-IPO
Publicly traded companies frequently differ from pre-IPO companies in a few ways (both restrictions and benefits).
[Restriction] Lockup period. As noted above, lockup periods are very common, but not required. Most traditional IPOs have a 90-180 day lockup period.
[Restriction] Blackout dates. Nearly all publicly traded companies institute blackout dates (periods in which employees are not allowed to sell their company stock) to protect the company and the employee against insider trading.
[Restriction] Pre-clearance individuals. Most senior management, as well as some well-informed corporate function employees (e.g. corporate finance; accounting), are frequently designated as a pre-clearance individual, meaning that even in non-blackout periods, they are required to get preapproval from their internal teams before selling shares of stock
[Restriction] Insider trading policy. As a publicly traded company, there is a need to protect both the company and individuals against the risk of insider trading. One of the tools publicly traded companies utilize for this is creating an insider trading policy, which specifies certain restrictions for employees stock trading. Notably, in some circumstances these policies can apply beyond company stock, and also restrict trading in competitors, customers, partners, and even select ETFs (if they hold a large portion of the company's stock).
[Potential Benefit] 10b5-1 plans. If you're a pre-clearance individual, you also likely will have access to (and be encouraged to use) a 10b5-1 plan. These plans allow you to pre-specify trading rules months/years in advance, which can occur during blackout periods (typically obviating the restrictions imposed on pre-clearance individuals).
[Potential Benefit] Employee Stock Purchase Plan (ESPP). Once a company is publicly traded, they can opt to offer their employees and ESPP. Depending on the program terms, these can be an attractive benefit to participate in.
Do You Want to Hedge? Can You?
If you're an employee of a publicly traded company, in most (but not all) cases your company will prohibit you trading in derivatives related to the company's stock -> by and large prohibiting you from hedging your position. But if you've left the company, it's likely that these rules no longer apply to you (though they frequently will apply during a lockup period). In that circumstance, hedging may be an appropriate tool to consider utilizing. For more information see: Hedge Your Stock
Strategic Tax Planning
With any liquidity event, a large number of tax planning opportunities exist. We've dedicated a section of this knowledge base site to detail 50+ tax strategies that you may consider, and highly recommend that you visit it as you develop your holistic plan and tax strategy.
Stock Comp Tax Planning Guide: 50+ Tax Strategies
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