Is your company preparing for an IPO?

After years of a relatively quiet IPO market, several high-profile private companies are approaching public offering events. If you work for one of these companies and have accumulated an equity stake, a successful IPO can be a truly life-changing financial event. It can also introduce unfamiliar complexities.

Much of the public conversation surrounding IPOs focuses on valuation, timing, and stock performance. For employees, though, the more consequential questions are often personal: “How much is this equity award actually worth, and what should I do with it?” and, “If this event truly changes my financial picture, what comes next?” In other words, what begins as a market event can quickly become a personal planning event.

Those who navigate this event successfully know to approach the moment with a plan in mind. Here are five questions worth asking before an IPO—or any major liquidity event—becomes a reality.

1. How much is my equity award actually worth?

Headline valuations can be misleading. While transaction costs are generally minimal, taxes can significantly reduce your take-home cash. The kinds of awards you hold will also determine tax treatment and what you can ultimately do with the assets. It is not uncommon to hold several different types of awards, such as:

• Restricted stock: these are shares of company stock. They’re “restricted” because the employee typically can’t trade them until certain vesting conditions have been met. Restricted stock awards can also be forfeited under certain circumstances.
• Stock options, such as nonqualified stock options and incentive stock options. This type of compensation gives you the right to purchase shares of company stock at a set price within a specific window.

2. How much of my financial future should I keep tied to this company?

Restrictions on selling shares can force many employees into a concentrated position. While this is often rewarding when the company is doing well, those who decide to remain with the company not only risk having their future income tied to that employer, but their net worth as well. That scenario introduces risks that should be carefully evaluated.

Employees often keep an emotional attachment to their company’s stock. The thought of selling might even trigger feelings of “betrayal.” It’s an understandable instinct to feel a sense of loyalty to a business that has provided you with meaningful, potentially life-changing wealth, but it is also important to look at things from a practical perspective. Ultimately, your equity award is compensation for work you’ve already done for that company, and once it is vested and unlocked, you are free to do with it as you please.

If you do decide to sell, the next step is determining how much to sell. This decision requires a careful evaluation of your outside finances and the tax consequences of the sales. This is best done by taking a holistic view of your entire financial picture—your financial advisor can help.

3. What planning decisions do I need to make before I exercise my options?

Many of the highest-impact planning opportunities arise before liquidity does. Once shares become liquid, though, certain strategies can become more difficult to pursue.

A common example concerns how and when to exercise your stock options, as is the decision to hold or sell. There may also be tax planning decisions you’ll need to make before selling shares. For example, some employees may benefit from gifting shares to a trust outside of their estate, or to a family member, to reduce tax liability. These decisions are highly dependent on your specific circumstances, but their impact is often strongest when they’re made in advance.

Equally important is ensuring the right team is in place. You’ll want to coordinate across all of your advisors, so everyone is on the same page when it comes to your equity ownership. Your CPA, estate attorney and financial advisor should be familiar with your situation and with each other so that everyone can work together to achieve the best outcome. Your financial advisor can serve as the organizing principal across all of these different functions.

4. Am I preparing for a liquidity event or a wealth event?

A lot can happen when your balance sheet changes more in six months than it has in the previous decade. Such events often translate to coordination challenges where investment management, tax planning, estate planning, and family governance all intersect.

New questions will almost certainly emerge around taxes, estate planning, philanthropy, trusts, risk management, and legacy. Your investment portfolio may require a higher level of expertise and guidance than it has in the past, and your newfound liquidity may grant you access to new investment opportunities. All of these factors become interconnected decisions that should be evaluated together rather than in isolation.

This is why many affluent families eventually move beyond traditional investment management and adopt a more integrated planning approach, such as a family office-style structure.

5. What does “financial independence” really mean for me?

Large wealth events create optionality for both owners and employees. You’ll likely face new questions about what the future could look like. For example: should you keep working? Change careers? Is now the right time to make that big purchase you’ve had your eye on? Perhaps you’re considering gifting some of your newfound wealth to family, or to charity.

There is rarely a clear, right-or-wrong answer to these questions. The first steps toward clarity may involve taking some time for personal reflection and a careful examination of your goals and values. You may also find consulting with family members, trusted friends, mentors, or professional advisors helpful.

In many ways, this is both the challenge and privilege of wealth. Having more financial resources creates greater freedom to make choices about how you spend your time, support the people and causes you care about, and define success. On the other hand, these decisions can be highly contextual, deeply personal, and have far-reaching implications. Ultimately, the goal is not simply to accumulate wealth, but to use it intentionally to build the life you want.

A trusted advisor can be a valuable resource during this period. They can help you evaluate opportunities, clarify priorities, and develop a plan that aligns your resources with your long-term goals. If you are an employee of a company that is preparing to go public and would like to explore these concepts further, give us a call at 310-556-2502 or email advice@westmount.com to speak with one of our advisors.